It’s not uncommon for someone wanting to buy a home but doesn’t get very far into the process due to the lack of funds available for a down payment. And beyond a down payment, there are closing costs associated with any mortgage. But while there are closing costs associated with a home loan that doesn’t always mean the buyer is responsible for paying them. Further, there are loan programs that require very little of a buyer’s own funds or even with no money from the buyers whatsoever. It just takes working with an experienced lender that can teach you how to buy a house with no money down, and no closing costs. How do they do it?
VA Home Loans
Perhaps the most well-known way to buy a house with no money down is the VA home loan. For those who are eligible for this program, the VA mortgage doesn’t require a down payment and it’s not reserved only for veterans of the armed forces. Other VA eligible borrowers include active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of duty can also apply. Surviving spouses of those who have died as a result of a service related injury may also be eligible. But what about the closing costs?
VA loans allow the sellers of a property to contribute up to 4.0% of the sales price toward the buyer’s closing costs. These closing costs include things such as an appraisal, title insurance, origination fees and others. For example, let’s say the sales price of a home is $300,000. If the seller contributed the entire 4.0% allowable, that’s $12,000 and that’s a lot. A VA loan officer can provide you with a cost estimate and you’ll find your closing costs closer to 2.0% rather than $12,000. No money down and the seller pays all your fees.
The United States Department of Agriculture also has a zero down loan program typically referred to as a USDA loan, or Rural Development loan. And just like the VA program, the sellers can pay for the buyer’s closing costs up to 6.0% of the sales price of the home. It’s very important to note at this point that seller contributions be common for the area. If not, then the lender might very well adjust the value of the property lower. The USDA loan must be used for a property located in an approved, rural area and the household monthly income must meet certain limits, calculated at 115% of the median income for the area.
The FHA loan can also be structured with no out of pocket expenses even though there is a down payment requirement of 3.5% of the sales price of the home. The down payment on an FHA loan can be in the form of a financial gift from a family member or qualified non-profit. The gift can also be more than 3.5% and can be used for closing costs. FHA loans also allow for a seller contribution towards closing costs not to exceed 6.0% of the sales price of the home.
The FHA loan is popular among first time home buyers, and in fact most “first timers” take advantage of the program due to the low down payment requirement but even though the FHA loan is a popular choice it’s not reserved for first time home buyers. It can be used by anyone, there are no income restrictions and there are no approved areas. The FHA loan, like the VA and USDA mortgage, can only be used to finance a primary residence and cannot be used for a rental property or second home.
We haven’t mentioned conventional loans but there are also ways to structure such a transaction. Fannie Mae, the largest purchaser of home loans in the United States, has a special loan program that only asks for down payment of 3.0% of the sales price of the home, not 20% as some might think. This program is commonly referred to as the HomeReady Mortgage with more relaxed qualifying guidelines.
With this program, the lender can contribute up to 2.0% of the loan amount in the form of a lender credit that can be applied toward closing fees. Further, borrowers can receive a financial gift and the seller can contribute as well. The HomeReady mortgage does not have any income restrictions as long as the property is located in an approved census tract as defined by the Census Bureau, or the property is not located in an approved area. The borrowers’ income may not exceed the median income for the area.
As a potential buyer, you will probably have to speak with an experienced loan officer who can show you how to buy a house with no money down. They can walk you through how to best follow lending guidelines and structure your deal correctly.