100% home loans are mortgages that finance the full purchase price of a home. this eliminates the need for a down payment. New home owners and repeat home buyers are eligible for 100% financing through VA Loan nationwide government-sponsored programs.
Do 100% loans exist in 2020 You bet they do. And there is a very good chance that you qualify.
If you never thought that you could purchase a home because of stringent down payment requirements? Well, if you are a United States Veteran or purchase a home in a USDA designated area then a number of mortgage options are available that allow a homeowner to finance 100% of the purchase price.
Most first time home buyers have assumed that 100% loans no longer exist after the market downturn late last decade. But there are a few zero down home loans that survived and are that are still available in 2020.
In the following article, you will start to learn about a few of these loan types. You’ll probably be surprised that you can still purchase a home with very little or even no money out of your pocket.
Many new home buyers wonder why loans even require a down payment. Why can’t the bank just finance 100% of the home’s purchase price?
It all comes down to the fact that the lender, bank, or the -investor wants to be paid back.
After many studies, banks and lending institutions have determined that the higher the down payment on a loan, the less of a chance that the homeowner will default. In fact, the amount of a home owners down payment is more important in determining the lenders risk than even the borrowers credit score.
That’s one of the reasons why that years ago, the gold standard down payment became 20%. Anything that is less than that required some kind of insurance, such as private mortgage insurance (PMI), so the lender would get their money back even if the borrower failed to pay back the loan.
Fortunately, the government has programs to provide insurance to the lender to protect the lender in the even of borrower default. See below a few of these loan types.
Many new home buyers ask “Is it really possible to buy a house with no money down?” The answer is yes.
And in the article to follow we’ll show you how.
The first step in finding a no money down home loan is to find a loan program that requires no down payment.
As previously stated , there are a number of options, like a VA Home Loan or a USDA loan. Even an FHA home loan can be a (100% home loan) zero-down home loan. if you receive gift of funds for the down payment that will cover the 3.5% down payment (more on that below).
If you are not sure which loan is the right loan for you depends really on eligibility.
While FHA loans have some of the most popular programs and are available to almost everyone that meets the criteria. For example you would need military service history to qualify you for a VA loan and if you want a USDA loan you would need to be buying in a rural area designated by the USDA . More on the various eligibility factors below.
Once you choose and qualify for your loan you will need to figure out how to cover all of the closing costs and third party fees.
Closing costs can average anywhere from 2.5% to 5% of the home’s contracted purchase price and include title, origination fees, insurance property taxes and other impounds and adjustments based on the time of month that you close.
So how can you pay for all of these extra costs? There are a number of ways.
Gift funds. Yes, most loan types allow you to use gift funds to cover your closing costs. You are permitted to receive gift funds from a family member, non-profit, church, employer or down payment assistance program, or other approved source. During Covid many of the Federal and State gift programs are no longer valid but as Covid passes they will return. There are still some grant programs available if you look hard. Most loan types let you use gift funds to cover closing costs. Gift funds can come from a relative that would like to help you with your closing costs.
Second mortgages. If your first mortgage doesn’t cover enough of the upfront costs needed, you may be able to get a second mortgage. Fannie Mae sponsors a loan program called Community Seconds® this program allows you to receive additional financing that can help you cover your down payment and closing costs from a municipality, non-profit, employer, or another affordable housing program. In some cases you can borrow more than the homes value and use those extra funds to cover closing costs.
Lender credit. Lenders can also issue a credit toward closing costs if you choose a higher-than-market interest rate. For example, if interest rates currently are around 4.0%, you could take a higher rate of 4.25% and receive thousands of dollars toward your closing costs directly from the lender.
Seller credit. When a seller really want to sell a house, they will offer what is called a sellers credit. They include a credit in the purchase contract as part of an agreement to help the buyer with closing costs. Sellers can typically contribute between 3% and 6% of the home’s purchase price to cover the buyer’s closing costs. These funds cannot be applied to the down payment, but can either reduce or eliminate the need to come up with the additional closing costs.
Credit cards. You are also permitted to use a cash advance for your closing costs when buying a house. But be certain to be upfront with your lender about where the funds are coming from — because they will not only find out but you may be making your loan not fundable by the lender if not done correctly. The lender will have to add the additional credit card monthly payment to your debt ratios, which may disqualify you for the mortgage. And, a bigger credit card balance can reduce your credit score, so be careful.
Down payment assistance programs and grants. Believe it or not, many cities, states, and counties in the U.S. offer some type of down payment assistance. And, there are nationwide programs too. You just have to dig up what’s available in your area. In many cases, you can receive assistance for the down payment and all closing costs associated with a loan.
USDA home value loophole. USDA loans allow you to take out a bigger loan than the purchase price if the appraiser says the home is worth more than you’re paying. For example, a home is for sale for $200,000 but the appraiser says it’s worth $205,000. You can take a loan out for the whole $205,000 and have five thousand dollars with which to cover closing costs. USDA is the only loan type that allows this strategy.
The USDA mortgage loan has been around for years, but it has become more popular recently because it requires zero money down and has lenient credit requirements.
It may sound too good to be true, but it’s a legitimate mortgage program that over a million home buyers have used since 1949. The USDA loan is a government-sponsored loan that exists to help develop rural communities by encouraging home ownership. That’s why this loan type is also known as the rural development loan.
To qualify, you have to have enough income to support your house payment, but not too much income. You have to be within limits set by USDA.
You also must buy a home that is within USDA’s geographical boundaries. Although the program targets rural areas, many eligible areas are suburban. You would be surprised at how accessible major cities are from USDA-eligible areas.
The USDA mortgage even allows the seller to pay your closing costs. This means you don’t have to come up with a down payment, nor do you have to pay costs of opening a mortgage if the seller agrees to pay them for you. With the USDA loan, it could be cheaper to move into a home you buy than to rent the same house.
There is a 2% upfront fee which can be financed into your loan amount and doesn’t have to come out of your pocket. The USDA also charges $29 per month on every $100,000 borrowed as an ongoing fee to make the program viable for future home buyers.
Even with these added costs, USDA loans are a great opportunity to break into homeownership with little upfront costs, and fairly low monthly costs, considering the low interest rates available for this program.
Another mortgage loan that allows you to finance 100% of the home’s cost is the VA home loan. This loan is available to applicants typically with at least two years of former military experience, or 90 days if still serving.
The Veterans Administration estimates that 23 million people in the U.S. are eligible for the VA home loan. That’s about one in every 13 people, and many don’t even know they’re eligible.
Anyone who is eligible should take advantage of this zero down home loan program. VA loans have very low rates – usually even lower than conventional loans. And they don’t require a monthly mortgage insurance fee like USDA, FHA, or conventional loans.
When compared to any other low down payment mortgage, VA home loans are the most affordable – in upfront as well as monthly costs.
With a VA loan, you can buy a home with zero down and have the seller pay some or all of your closing costs, meaning you could own a home with no money out-of-pocket.
Lenders typically allow lower credit scores on VA loans as well. While most lenders require just a 640 score, some allow you to have a score as low as 620.
The VA home loan is the easiest 100% home financing option available. If you have served in the military, the VA home loan is worth checking into.
There are a number of options if you’re in the market for no down payment mortgages. The U.S. government wants people to buy homes.
It’s easy to see why.
The National Association of Home Builders estimates that homeownership drives between 15-18% of the country’s economy. That’s huge.
Without housing, the U.S. economy would basically stop.
So, Uncle Sam has created ways to buy with zero down, and will even give you a fantastic rate on these loans. No down payment mortgages often come with lower rates than loans that require 20% down.
The USDA, FHA, and VA loans all come from essentially the same place — government-run organizations that want to spur homeownership.
You might be a renter, but the government doesn’t want you to stay that way for long.
Its mission is to provide the average buyer with low- and no-down-payment loan options. And these government orgs don’t even require that you have a high credit score. Lenient lending lifts the homeownership rate and drives the U.S. economy forward, and is a win for everyone.
As a first-time home buyer, you probably don’t have much to put down on a home. Maybe nothing at all. But thousands of buyers per month are able to close on a home purchase — and these buyers are not that much different than you.
The key is to find the right loan program or combination of programs.
If you’re buying outside a major metro area, check into the USDA loan. It’s a no down payment program. You don’t have to be a first-time home buyer to get one, but this is who usually uses it.
If you have a military background, you could be eligible for a loan from the Department of Veterans Affairs. It requires nothing down and rates are typically lower than for FHA.
If you choose a loan program that requires a down payment, look around for secondary programs. Your city, state, or county may provide grants and down payment assistance to help first-time home buyers break into the housing market.
See our post about available down payment assistance programs around the country.
Don’t think you can buy a home with no down payment? It might not be as hard as you think.
One point I like bring up when talking about zero-down loans is that you need to think about closing costs. Every time a mortgage loan is opened, there are costs associated with it, such as the appraisal, title, loan processing fees, mortgage points, and more. Someone has to pay these fees.
Typically, it’s the buyer’s responsibility to pay most of the closing costs. That could range anywhere from $2,000 to $5,000 or more. That’s why some first time home buyers are surprised when they have to come up with a few thousand dollars, even when getting a 100% mortgage loan.
But there are ways to get around this expense. The most common way is to receive a closing cost credit from the seller.
In some cases the seller will offer closing cost assistance as an incentive for buyers. It costs the seller money, but increases the chances that the home will sell. Talk to your real estate agent about requesting closing cost assistance. It’s not always available, but when it is, it’s a great help to those buying with a 100% financing mortgage.
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