If you were to ask a real estate agent how much their buyers would put down on a new home if they had a magic wand and could offer any number, the answer would invariably be “all cash.” All-cash buyers are attractive to sellers because there’s less potential headache with loan approvals or contingencies. But, if you meet the right criteria, you can still find 0 down home loans to buy your next property.
Unfortunately, in this market, most 0 down home loans won’t allow you to submit bids significantly over the asking price or waive contingencies, but that doesn’t mean you are locked out of the market. Instead, you’ll just need to have more patience when making offers, adopt a practical mindset when identifying potential purchases and be prepared to pursue multiple listings.
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All three methods for securing either a low down payment or 0 down home loans are supported by government programs. The FHA, which allows first-time homebuyers to put down as little as 3.5%; the VA, which can allow veterans to secure loans with as little as 0% down; and the USDA, which works with buyers in “rural” areas, can all make the initial step towards home ownership more affordable if you meet the right criteria. Let’s explore a brief overview of each program.
3 Paths to Low or 0 Down Home Loans
Let’s begin with VA-backed loans. With a VA-backed loan the Department of Veterans Affairs will guarantee a portion of the loan amount which allows eligible veterans to work with private lenders to secure favorable loan terms, like lower rates or 0 down home loans. The first step is securing a Certificate of Eligibility from the VA. After that, the home shopping process proceeds relatively normally, the prospective borrower will calculate how much home he or she can afford, choose a lender, a real estate agent and ultimately, start home shopping.
Keep in mind that just because the loan is backed by the VA, it doesn’t mean that you’ll avoid your lender’s closing costs. Some of those are negotiable so shop around just as you would if you were any other buyer. For borrowers that may be eligible for a VA-backed loan, the VA offers this helpful website to explore eligibility and the buying process.
Next up in our discussion is the USDA. The U.S. Department of Agriculture operates a Rural Development program that’s intended to further develop in “rural” areas and support the dreams of homeownership for low- and moderate-income individuals and families. This program extends 0 down home loans to eligible buyers to buy, build, rehabilitate, relocate or improve a primary residence in a rural area.
Don’t let the rural designation fool you, the USDA’s regional eligibility includes many areas in the suburbs and exurbs of major cities. More limiting than that designation are the income limits, which require prospective buyers to fall below a certain earnings threshold depending on location. However, USDA loans also allow buyers to include the costs of necessary improvements in the amount of the loan, which make these loans excellent for buying fixer-uppers or properties in need of rehabilitation. If you believe you may meet those income thresholds, the link above will allow you to conduct an eligibility check or begin applying.
Lastly, FHA loans are a fairly well-known option, especially for first time buyers (although they’re also available for other buyers). With FHA loans, buyers may be able to put down as little as 3.5% of the value of the home as a down payment (but may be required to put down as much as 10% depending on the buyer’s credit score). To further reduce the costs of buying a home, certain closing costs can be covered by gifts from relatives and there may be down payment grants available depending on the area.
With FHA loans, be prepared to pay for Private Mortgage Insurance (PMI), which typically costs 0.5-2% of the original loan value per year. This added expense can limit your affordability, but it may be the difference between continuing to rent and beginning to build equity in your own home. Plus, should your equity in the home rise to more than 20%, you may be able to refinance your loan to get rid of PMI at a later date.
This is just a quick breakdown of programs that offer low or 0 down payment home loans and if you believe you may be eligible you should begin with the eligibility information on the respective programs’ websites. Saving 20% for a down payment can be a high hurdle for borrowers, but these programs can help.
Have you purchased a home using the programs above? What was your experience?