The biggest misconception among renters is that a large down payment is necessary to buy a home. Then many will rent for an extended period thinking that a home purchase is unreachable. A recent article by Citylab, “The down payment is too ‘daggum’ high” explained it well. It explains how many renters cite lack of funds to cover the down payment as the top reason not to buy. But actually there are some great no down payment mortgage options available to many. Even other programs with small down payment requirements allow gifts from family and other sources. On top of that, lending agencies have relaxed guidelines for how student loan payments are treated. Often student loan debts have caused issues for younger buyers. Therefore restrictions born from the economic downturn are loosening. So why are you still renting or living with family?
“Restrictions born from the economic downturn are loosening.”
Renting Vs Owning a Home
First of all, renting is not always a bad choice. There are times that renting works out better than owning. For instance, living in an area for a very short time or there is uncertainty about living arrangements. Below are comparisons to consider when choosing between renting and buying.
Rent Vs Own Comparison Chart
When a prospective buyer decides that homeownership is a good fit, then there are some great options. These mortgage loans with no down payment provide a way to make it happen. Even some options that require a small down payment, allow for it to be a gift. So let’s discuss these great first time buyer solutions!
No down payment mortgage loans
Obtaining a mortgage with no down payment is easier than you think. Obviously sufficient income and credit are a requirement. But perfect credit is not required as sometimes there are options for scores as low as 600. Plus, buyers may even have rent history and a couple other credit references to purchase. Let’s explore these wonderful options that could move you from renting to owning.
USDA No Money Down Mortgage
USDA Rural Development Guaranteed home loans offer 100% financing, while being very flexible in qualifying. In 2016, USDA was able to lower its costs dramatically which made it one of the most affordable home options. As mentioned above, these loans have flexible guidelines. It is even possible for approval with as low as a 620 credit score. USDA is not only available for first time buyers and often proof of prior rent history is not required. Although a prior rent history is always helpful in a buyer qualification.
Contrary to many beliefs, Rural development loans are not just for small homes and very low income families. Actually, the USDA program will lend up to $424,100 in most neighborhoods. In order to use USDA, the property must be located in a USDA eligible area. Luckily most areas in the Southeast US qualify. Check out our step by step guide for searching USDA property eligibility. Also, compare rent vs buying payments using our USDA payment calculator.
VA No Money Down Mortgage
Service members, Veterans, and qualified surviving spouses have the ability to use one of the best loans available. VA home loans offer buyers the ability to purchase a home as a no down payment mortgage. If you are a Veteran, MAKE SURE THAT YOU MENTION IT! We will always ask anyway, but being a Veteran could bring some great home buying advantages. Using a VA home loan for the first time typically allows a buyer to finance 100% of the purchase price. Although there are county VA loan size limits, they are very liberal for a first time buyer.
First time buyers can even include closing costs, prepaids such as 1st year of insurance and escrow set up, or pay off a debt through seller paid concessions. So these are huge advantages for VA borrowers as there is usually no down payment and the seller can pay the costs. Additionally, VA loans are very flexible in calculating deferred or IBR student loan payments. Read a recent article that explains the changes to VA student loan guidelines.
FHA No Money Down Mortgage
Ok FHA is not a no down payment mortgage, but it is only 3.5%. Not 20% like many believe is required for home purchases. Plus the 3.5% down payment may be a documented gift! Therefore, a buyer can purchase a first home with none of their own funds into the transaction. That’s quite an opportunity for first time buyers. Although these benefits could be enough to want to buy, FHA has so many more advantages.
- Seller can pay closing costs
- Down to 600 credit scores
- Higher debt to income ratios allowed
- Co signors are allowed that do not have to live in the home
- Only one year of commission income versus normal 2 year requirement
- Manufactured home purchase
So with all of these benefits, a buyer is much more likely to qualify than not assuming sufficient credit and other qualifications. FHA has long been one of the cornerstone mortgage products for first time buyers and it continues to improve.
Fannie Mae & Freddie Mac Loans Allow Gift for Down Payment
Like FHA, conventional loans are not a no money down mortgage. Yet, they do offer as low as 3% down payment. Additionally, the down payment may be a gift from an allowable source. So if buying a first home, the buyer could put down 3 – 5% and the whole down payment could be a gift. Then the seller could pay part or all of the closing costs. Therefore resulting in a purchase where the buyer may not have any of their own funds into the transaction. That’s a pretty good deal! Although conventional loans typically look for higher scores, they can still be flexible. There is even the Fannie Mae HomeReady loan which offers 3% down payment plus reduced mortgage insurance. Plus overall PMI amounts have decreased recently which helps lower a buyer’s payment for conventional loans.
Both Fannie Mae and Freddie Mac have loosened guidelines when student loan payments are involved. This especially helps renters with student loans in Income Based Repayment. These programs could allow the use of the lower IBR payments reporting on credit. Conversely some other loans require the use of 1% of the outstanding balance, which can make qualifying difficult. The good thing is Fannie and Freddie loans today are much more flexible and affordable compared to recent years. So if you thought that renting or living at home is the only option, check into these wonderful options.
Down Payment Assistance Available to Cover Down Payment
So what if a buyer isn’t a Veteran and the property is not located in a USDA eligible area? That is where down payment assistance or DPA can help. DPA will help bridge the gap between the purchase price and the mortgage loan, also known as down payment. Therefore potentially making a no down payment mortgage. There are some wonderful products offered through state housing agencies and we are an approved lender for these. Examples include NC Housing Finance Agency and SC State Housing Finance & Development Authority. Both help buyers achieve homeownership through affordable products and down payment assistance.
NC Housing Finance Agency Advantages
- $15,000 DPA – Limited time for Mecklenburg, Cumberland, Cabarrus, Guilford, and Johnston counties
- 3 – 5% DPA for first time or subsequent buyers to be used for down payment and/or closing costs
- MCC tax credit up to $2000 per year
SC Housing Advantages
- $6000 DPA for down payment and/or closing costs
We hope this helps to dispel the myth of needing a large down payment. With these no down payment mortgage loans, why continue to rent? Home prices and interest rates are expected to increase which adds even more urgency to the decision. In addition to having pride in ownership and being in control of your domain, there are other advantages of homeownership. Check out are article “How to get into real estate investing and build wealth“. Once the first home is purchased with a no down payment mortgage, that buyer is a real estate investor.
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.