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When it comes to buying a house, coming up with a big chunk of cash in the form of a down payment is typically the biggest obstacle.
Buyers will usually be advised to put a down payment of 20% on a home because mortgage insurance will need to be tacked onto a mortgage if it’s any less. Financial planners will also suggest putting at least this much in the form of a down payment in order to decrease the amount of the loan, and therefore pay less in interest towards the outstanding principle.
Unfortunately, many home buyer hopefuls simply don’t have that kind of money stashed in their banks accounts. Many of them end up being eternal renters as a result.
But believe it or not, you can change your status from ‘renter’ to ’home owner’ even if you don’t have that much liquid cash for a down payment. In fact, it’s even possible to buy a home with zero down payment, as long as you qualify.
There are some programs out there that allow buyers with good credit and a regular income to buy a house with a low a down payment – or none at all.
Low Down-Payment Loan Options
If you can scrounge up a little bit of cash for a down payment, you may be able to tap into these options:
The Federal Housing Administration (FHA) – Loans insured by the FHA are available to most borrowers. With this loan option, a minimum 3.5% down payment is needed. About 15% of all home buyers use FHA loans in order to purchase a home without a big down payment. The FHA charges borrowers a premium of 1.75% of the mortgage amount up front. For loans with the minimum down payment amount, an annual premium of 1.25% of the mortgage amount will be charged.
Private mortgage insurance – There are many companies out there that offer private mortgage insurance to borrowers who can’t front the 20% down payment. While these types of loans require a down payment slightly higher that what the FHA requires, buyers who can come up with a 5% down payment will usually benefit from lower monthly mortgage payments compared to equivalent loans backed by the FHA.
No Down Payment Options
If you just can’t come up with any money at all for a down payment, there are still options available to you:
VA loan – Veterans Affairs guarantees qualified veterans and their spouses with no-down purchase mortgages of they are unable to come up with the cash. Private lenders give out the loans that the VA guarantees. Although the borrower is required to pay a funding fee, there is no mortgage insurance.
This VA funding fee will vary depending on how the veteran served time: in the regular military, in the Reserves, or National Guard. The fee will also depend on whether it’s the veteran’s first or subsequent VA loan. Usually the fee ranges from 2.15% up to 3.3%.
Navy Federal loan – The Navy Federal Credit Union offers 100% financing to members who qualify for buying their primary homes. Those who are eligible include members of the military, certain civilian employees of the military and US Department of Defense, and family members. The credit union’s zero down payment program is somewhat like the VA’s, expect for one major difference: the cost. The funding fee associated with the Navy Federal is 1.75%, which is much less than the VA’s funding fees.
Department of Agriculture’s Rural Development – This mortgage guarantee program has become increasingly popular, and is not just confined to farmland, despite what many people may think. As long as buyers meet credit and income requirements, and are able to afford payments on the loan, eligibility can be met for this mortgage guarantee program. In addition, the property being bought needs to be located within an area that’s designated as eligible for such loans.
Just because you don’t have 20% to put towards a down payment – or 5%, or anything at all for that matter – buying a home isn’t necessarily off the table. Use a little investigative skills to find out what’s available for someone in your financial predicament. To make the search a lot faster and easier, discuss your options with an experienced mortgage specialist.