Mortgages

Can You Still Buy a Home With No Down Payment?

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Are you considering buying a home this year? Most would have you believe that you need at least a 3.5% down payment to get a mortgage. But there are actually a few ways you can get a home with 100% financing.

Here’s what you’ll need to get the keys: a good credit score — a 700 or better with a clean payment history; consistent income, with a solid work history for at least the past two years; and an ability to afford a mortgage payment.

Conventional Loans

What it is: In order to buy a house with a conventional loan, you’ll need at least a 5% down payment. The 5% down payment can come in the form of a gift, and you no longer need to have a minimum contribution to the down payment. The entire down payment can be a gift as long as you’re buying a single-family home. And single-pay mortgage insurance is a little-known benefit that simply allows you to pay a portion of the future years’ PMI payments upfront in one lump sum at close of escrow. Typically, you’re required to have private mortgage insurance (PMI) when you have less than 20% equity on a refinance or less than a 20% down payment when buying a home.

How it comes together: Gift money would come from your parents or a relative, which makes up the 5% down payment (5% of the sales price of the home). The loan is structured so that the seller of the property pays the closing costs along with the single pay mortgage insurance amount due. If you have strong income and can offset a higher sales price and the house appraises at that amount, you’re in. Then, you’ll have no monthly PMI because it’s paid upfront by the seller along with the rest of the closing costs — and the down payment funds are gifted.

What to remember: Closing costs can be usually 2.5% of the sales price of the property and single mortgage insurance is on average 1.75% of the loan amount. You’ll need the seller’s concession to pay these costs and seal the deal.

Family-Owned Homes

What it is: You buy a property from a family member with a conventional loan and you’ll still need the 5% down payment. The down payment would come in the form of a gift of equity because there is a relationship between the buyer and the seller.

How it comes together: Gift money is provided as a gift of equity from the net proceeds of the transaction. In other words, the 5% minimum down payment comes from the net proceeds after sales price and paying off any liens against the property. This is also exactly where the closing costs credit would come from along with the credit for single-pay mortgage insurance, which is considered to be a closing cost.

What to remember: In a traditional sale when there is no relationship between buyer and seller, it’s called an arm’s length – the seller in such a situation isn’t permitted to gift down payment funds to the buyer. Instead, the buyer must obtain those funds from another donor. However, in the family-owned property situation, because there is a relationship between buyer and seller, the transaction is considered to be non-arm’s-length. As such, the seller can gift the down payment and all closing costs to the buyer (their family member) from the net proceeds of the transaction. Such a scenario would also contain no monthly PMI and no cash out of pocket.

Perks for Military Veterans

What it is: If you’re a veteran who qualifies for the VA guaranteed loan program, you can buy a house with no down payment and no gift funds. The program also does not contain any monthly PMI, but in most circumstances will contain an upfront 2.15% funding fee financed in the loan amount. The seller of the property would pay the closing costs for you, or the closing costs could be paid in the form of a gift.

How it comes together: You make an offer to purchase a home for higher than the asking price or whatever asking price you deem fit, and ask for a 2.5% seller concession for closing costs. The seller of the property in an arm’s length transaction (remember: no relationship between buyer and seller) receives lower net proceeds; the money is then given to you, completely omitting your cash to close on the house. Another tip is to ask the lender for a lender credit at closing, which also can pay closing fees.

What to remember: VA loans require a full pest report paid for by the seller of the property. In re-sale properties, this can be somewhat limiting, as many sellers don’t want to pay for a pest inspection and any subsequent repairs that are deemed necessary to meet VA loan requirements.

More on Mortgages and Homebuying:

Image: Catherine Yeulet

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