For first-time homebuyers, the down payment is often the biggest barrier to homeownership. A lot of us went through the post-college days where we ate ramen every night, shopped the clearance bins, and went to the dollar theater while getting on our feet. But even if you pinch pennies, it’s often not enough to save up for a home.
Chiquita Pittman is an experienced agent in New Jersey who works with 7 more townhomes and 21 more condos each year than the average agent in her area. She also conducts monthly webinars for first-time homebuyers with the New Jersey Housing and Mortgage Finance Agency and the Puerto Rican Action Board.
She says that through combining state programs and with the seller paying closing costs, she had one buyer who “only had to bring $3,500 to the table.”
If buying a house with little to no money sounds good to you, read on for our nine tips on how to get it done.
How do you buy a house with no money?
For most borrowers, you’ll need money for the down payment and closing costs. To lenders, this demonstrates that you’re willing to invest in the home, making you a key stakeholder. It also reassures them that you are less likely to stop making payments on the loan, sending the home into foreclosure.
However, for many homebuyers, 20% down on hundreds of thousands of dollars is out of reach. While some mortgages allow you to put between 3% and 5% down, you need to know where to look.
There are also some zero-down programs that exist, plus other creative ways you can buy a house without having a lot of money in the bank.
Are you enlisted in the military, a veteran, or surviving spouse?
Then a Veterans Affairs loan is probably going to be your best bet.
The VA either guarantees the loan or lends directly so that you don’t have to put anything down on a house. There are two VA loan programs to help you buy a house:
- Purchase Loan: No down payment as long as the loan isn’t higher than the appraised value of the home. You will pay a funding fee and closing costs.
- Native American Direct Loan: If you’re a member of a tribe that has an agreement with the VA, you can borrow with no down payment and limited closing costs, at a rate of 2.75%, and only pay the funding fee.
The VA bases your funding fee upon both the percentage amount of your down payment and the loan amount. For example, if you put down less than 5%, you’ll pay a funding fee of 2.3% of the loan’s amount. If you’re borrowing $200,000, the funding fee will be $4,600.
Another big plus of a VA loan is that you don’t have to pay mortgage insurance. Mortgage insurance, or MI, protects the lender if you stop making payments on your mortgage loan. If you have less than a 20% down payment with a conventional loan, it’s likely that the lender will require MI. Because the VA guarantees a VA-backed mortgage, lenders waive this requirement.
Rates are competitive, but you must meet certain requirements. The VA-approved lender will set the credit score limits and maximum debt-to-income ratios. You will also need to obtain a Certificate of Eligibility or “COE” from Veterans Affairs, and don’t forget about the funding fee!
Do you make around a median income for your area?
The US Department of Agriculture offers loans for borrowers in rural areas. Before you assume that you have to buy a farm, check their coverage map for lending areas. Their coverage map can (and does!) overlap with some homes in the suburbs.
A USDA loan might be a good option for you if you don’t make significantly more than the median income for the county where the home is located (usually that’s no more than 115% of the county average). This limit varies by location, helping less affluent borrowers in expensive states afford a home. When modified by payment assistance, your interest rate could be as low as 1%.
You can put 0% down and not have to pay monthly mortgage insurance on these loans, either. Lenders place credit score and debt-to-income requirements on the loan, but the USDA also has the following requirements for the property you’re buying:
- You must live full-time in the home.
- The home’s square footage must be 2,000 square feet or less.
- The home’s market value can’t exceed the applicable loan limit for your area.
- Your debt-to-income ratio can’t exceed 45%.
- The home can’t have an in-ground swimming pool.
- The home can’t be designed for income-producing activities (such as a duplex).
Are you qualified as a ‘Good Neighbor’?
Firefighters, K-12 teachers, law enforcement professionals, and people in other specialized careers might be eligible for HUD’s Good Neighbor Next Door, or “GNND,” program.
When HUD acquires ownership of an eligible home in a revitalization area, they list those homes for 50% of the market-value price. However, they’re exclusively open to GNND borrowers for the first seven days, so you’ll have to stay on top of their listings to snag one. If more than one qualified borrower applies for a property, you’ll be entered into a random lottery, and HUD will pick the applicant who gets the house.
You can put down as little as $100 … so not exactly nothing, but pretty close! HUD requires that you sign a second mortgage for the amount of the 50% discount, but there’s no interest charged on this “silent note,” and you don’t have to make payments on it. After three years of living in the home as a primary residence and making on-time payments, they’ll forgive this second mortgage.
What are the requirements?
- You have to be occupied in one of the approved careers (firefighter, K-12 teacher, or law enforcement professional) when you buy the house.
- You have to live there as the owner-occupant for at least three years.
- If you find a home you like, you have to submit your interest in purchasing it to HUD.
- Lenders set debt-to-income and credit score limits.
Can you combine assistance programs?
If you qualify for multiple down payment assistance programs, you could combine them to make up a larger down payment. Many of these programs don’t have restrictions that prevent you from lumping the grants together. In Pittman’s work with the NJHMFA and PRAB, she frequently helps homebuyers combine programs.
“From the state, there’s a $10,000 grant,” she says.
“If they stay in the property for five years or more, they don’t have to pay it back.”
Buyers can then combine the state grant with a $5,000 grant to first-time homebuyers from the PRAB. That makes a total amount of $15,000 for a down payment. Keep in mind that some of these programs require you to bring some money to the table, which the grant will then match. You likely won’t have to pay the grant back, but you might have to put down an equal amount to the grant.
Talk to an agent to get a referral to a lender in your area who is experienced with combining assistance programs. If you are a member of a special group, see what nonprofits offer help to purchase a home. If you qualify for more than one program, it can be a great way to make up a larger down payment.
Do your loved ones have the resources to give you a monetary gift?
If you’re struggling to save up a down payment, a family member or loved one might be able to help. You can use gifts for down payments with many loan products, including both an FHA 3.5% down loan, or a conventional loan (3% minimum down).
In 2020, Pittman saw a first-time homebuyer’s kids give their mom their stimulus checks. With this gift, “they were able to buy a house for the first time with little money down,” she says. Pooling resources within the family is a great way to build a future for all family members.
Do you qualify for closing cost assistance?
Programs in different states can help with closing costs, so it’s worthwhile to explore that possibility before you write an offer on a house.
If you’re looking for what your state offers, try searching Google for “your state + department of housing and urban development + closing cost assistance.”
Can you get the seller to help with closing costs?
In a buyer’s market, it’s not uncommon for sellers to pay for some or all of a buyer’s closing costs. Closing costs typically run between 2% to 5% of the purchase price, so you could save several thousand dollars. A good agent will help you negotiate closing costs during the offer period.
Pittman did a deal last year where the seller paid some of the closing costs, but she cautions that “If it’s a competitive market, it’s hard to get that done.” Since some government-sponsored loan programs limit the amount of closing costs that a seller can pay, check with your lender.
Would the seller consider financing the purchase?
Seller financing is an unusual solution, but it could work. With seller financing, the seller extends a private mortgage. It can be done through a rent-to-own agreement, or the seller might be able to work out a payment plan with you.
In some cases, you still have to put money down and could forfeit that deposit if you default on the agreement’s terms. Often, you’ll agree to a purchase price in the future. You’re taking the risk that if the property goes down in value, you still have to pay the agreed-upon price.
If you decide to go this route, make sure you get lots of good legal advice!
Kelly Springer, a partner at the firm Willenbring, Dahl, Wocken, & Zimmermann, has handled many contract-for-deed transactions. She says that they’re, “Really good for a buyer who can’t get traditional financing when they want to get a property.” But you’ll want to have a lawyer look over the rent-to-own contract to make sure it covers who pays for repairs, whether your monthly payment includes property taxes and insurance, and the interest rate you’ll pay.
She cautions that since these deals are more frequently done for buyers with poor credit, the seller is “going to charge a higher interest rate than what the market would do for a mortgage.” While this is one way to become a homeowner, you might be better off waiting to buy until you’ve improved your credit score and saved a larger down payment.
Could you take over the seller’s mortgage?
In some cases, the seller might agree to sell the house “subject to” the terms of the current mortgage on the house. If they have an assumable mortgage, they can sign it over to another person.
This usually requires a small down payment. The mortgagor will still review your credit, and you must meet their income requirements.
With some creativity, most homebuyers can reach the day where they’re holding the keys to their first home in their hand. If you take some time to research programs in your state and work with an experienced agent and lender, your homeownership dreams can come true sooner than you think!
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