Take advantage of low- and no-money-down mortgages

Buying a home with no down payment takes care of one of the most difficult parts of home purchase: the down payment. It’s difficult to save that much money, and it’s scary to put it all into a home when there are other needs and uses for that money. You can certainly find lenders that offer no money down loans, but it’s important to understand the pros and cons of those loans.

Mortgages With No Down Payment
Putting zero down on a home is a real possibility, which has put homeownership within reach for those who may not have the means to save for a down payment. Here are a couple of home loan options that require no money down.

VA Loans
Insured by the Department of Veterans Affairs (VA), VA home loans are available to U.S. military veterans, eligible active duty service members, and qualified surviving spouses.
While VA loans are originated by private lenders, the VA guarantees them and no down payment is required. AVA loan can only be used for a primary residence, although it may be a multi-unit structure with up to four units. In addition, the veteran has to live in the home. It may be occupied by a spouse if the service member is actively deployed.
Another benefit of getting a VA loan is that you don’t have to pay mortgage insurance. However, you’re typically required to pay a funding fee. This is a one-time charge that can be rolled into your loan balance. The amount you pay depends on your transaction type, service type and whether you’ve had a previous VA loan. First-time VA loan borrowers pay a smaller funding fee.
When it comes to loan limits, the VA doesn’t set a limit on how much you can borrow with a VA loan. However, there are limits to how much the VA will guarantee. These are called conforming loan limits. They’re set by the Federal Housing Finance Agency and fluctuate from year to year.

USDA Loans
Like VA loans, USDA loans are originated by private lenders and guaranteed by a government program. In this case, the guarantee comes from the U.S. Department of Agriculture. Despite what the name may suggest, eligibility is based on location, not occupation. Borrowers looking for a primary residence located within specified rural and suburban areas may be eligible for a USDA loan.

In order to qualify, you must also meet certain income requirements. The USDA requires that your household income not exceed 115% of the median household income in your area. Additionally, your debt-to-income ratio can’t exceed 50%.
USDA loan borrowers can finance up to 100% of the home’s purchase price. This means you don’t have to worry about putting any money down on your home. However, you will have to pay a guarantee fee, both upfront and annually.

The current upfront guarantee fee cost is set at 1% of the home’s purchase price. If you were to buy a home with a $150,000 price tag, you would be required to pay a $1,500 guarantee fee at closing, but like the VA’s funding fee, you could roll it into your loan amount. The annual guarantee fee is currently set at 0.35% of the home’s purchase price. This means a $150,000 home would have an annual guarantee fee of $525.

Other Sources
If you don’t qualify for a VA or USDA loan, you may be able to buy with no money down using other sources (or you may need to make a small down payment). In years past, it was easier to buy with no down payment. After the mortgage crisis, it’s not as easy.

Down payment grants and assistance can help you effectively buy with a zero percent down payment. Technically, somebody is making a down payment, but it might not be you. Search for local organizations that you may qualify for, and ask a local Department of Housing and Urban Development (HUD) representative for any resources available. Some first time home buyer programs may also be helpful. These programs are hard to find and harder to qualify for. However, if you are the right fit for an organization, you may be able to get the help you need.
80/20 loans, also known as piggyback loans, allow you to buy using two loans. Before the financial crisis, this strategy was a popular strategy. Nowadays, you’ll need the right credit and income profile to qualify. To use this approach, you’d get a first mortgage for 80 percent of the home’s value (giving you an 80 percent loan to value ratio for that portion, which means you would not have to pay private mortgage insurance). The remaining 20 percent comes from a second mortgage that you get at the same time as your first mortgage.

The second loan will have a higher interest rate, but borrowers typically try to pay that loan off quickly. Check with local banks and credit unions to see if they offer 80/20 loans and to find out what the requirements are.
Private lenders may be willing to lend you 100 percent of a home’s purchase price. These may or may not be professional lenders. In many cases, those loans come from family members who just want to help out (they are not in the business of lending). If you go that route, use a written agreement so that everybody understands (and has documented) the details of your arrangement.

Consult with a local attorney, real estate expert, and an accountant before you sign the agreement, as you will want to follow all applicable laws (and you may be able to get tax or other benefits if you set things up properly). If you’re fortunate enough to have that option, it can be a win-win situation, but everybody needs to know what they’re getting into.

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