In Q2 of 2022, the median sales price of a home across the United States hit a whopping $440,300. Quick question: how much money do you have in your bank account right now? If it’s less than $88,060, you don’t have enough for the recommended 20 percent down payment to buy a home. The average American doesn’t have anywhere near $88 large in cash.
So, does this mean that, for most Americans, the dream of homeownership will always remain exactly that—a dream? With house prices so high, who can possibly scrounge up nearly $90,000 while they have expenses like power bills, car payments, and more?
There’s good news: if you can’t come up with 20 percent down, you can still buy a home. There are options available for those who seek to buy a home with no down payment needed. In this article, we’ll look at options for how to buy a home with no down payment—or at least not a 20 percent down payment.
Before we can look at how you can buy a home with no down payment, it helps to understand the purpose of a down payment in the first place. Broadly speaking, a down payment has two primary benefits, one for the borrower and one for the lender.
For the payee, the benefit of a down payment is clear—it demonstrates that the buyer has financial resources and, therefore, will be much less likely to default on the debt they’re taking on. Since they’ve already paid you money, they’re less likely to “dine and dash,” so to speak (as much as anyone can dine and dash when it comes to a home purchase). You can trust that the buyer now has skin in the game and is a trustworthy person to engage in a long-term contract with.
For the payor, the benefit is less obvious but no less real. With a down payment, you do two things that can ultimately reduce the amount of money you spend on a home. The first is, again, building trust between you and the seller. If the seller believes that you are a trustworthy buyer, they may be more inclined to offer you favorable loan terms, such as lower mortgage rates.
Second, a down payment simply reduces the amount of money you have to borrow, which in turn reduces the impact of compound interest over time. For instance, with a $400,000 home, a 30-year mortgage with 20 percent down, or $80,000, at a 5.5 percent interest rate will run you $1,817 a month, and you’ll pay about $334,000 in interest over the life of the loan. But with 3 percent down, or $12,000, the monthly payment is instead $2,203, and the total interest is about $405,100. That’s a monthly payment of almost $400 less and over $70,000 saved in interest over 30 years.
You can play with a mortgage calculator and try your own numbers. It’s clear that down payments, if you can afford them, are beneficial. But don’t worry. There are many options to buy a home without a huge down payment.
There are several government-backed programs that can make it easier for you to get into your new home without any money down. However, not all of them are available nationwide, and some of them have specific eligibility requirements.
These are loans backed by the Veterans Administration. As the name (and government agency) might suggest, they are only available to America’s veterans and their spouses or widows. These are truly zero-down home loans, as there is no down payment required. The program does require a small funding fee, but this is typically only a couple thousand dollars.
Administered by the US Department of Agriculture, these loans are similarly zero-down loans. However, since they are designed to encourage homeownership in rural areas, they aren’t available for homes everywhere you might want to buy. On the other hand, the population limits that determine what’s considered a rural community are quite permissive and include areas near—though not in—many urban areas.
Some of the most popular government-backed loans in the nation, Federal Housing Administration (FHA) loans are run through the Department of Housing and Urban Development with the purpose of helping first-time buyers get a home. Unlike other options, this isn’t a true zero-down home loan since FHA loans do require a down payment. However, this down payment can often be very low, usually under 10 percent. FHA loans are also very attractive since they are available to those even without great credit.
On the other hand, FHA loans do have a cap on the maximum that can be borrowed, so you may need to look for a smaller home. And they are specifically for first-time home buyers, so you can’t use these for second homes, new homes, or rental properties.
While these government programs can be very useful for helping people buy a house without a down payment, they may have restrictions or be otherwise not feasible for you or your situation. That still doesn’t mean you’re out of luck.
Remember when we discussed the purpose of a down payment on a mortgage? Realistically speaking, there’s no need for a down payment at all. It’s simply part of an agreement between you and the lending institution holding your mortgage. This means that a lending institution can choose to simply offer you a zero-down mortgage—no governmental strings attached. For instance, for customers in the Pacific Northwest, Solarity Credit Union makes it possible for qualified purchasers to buy a home with no down payment even if they don’t qualify for first-time homebuyers, VA, FHA, or USDA loans. The right lender will help make homeownership more accessible.
Buying a home with no down payment isn’t for everyone. As mentioned, there are benefits of a down payment, and absent that reassurance, lending institutions may be a little stricter about who they lend to, preferring people with strong financial qualifications. But at the end of the day, it’s getting you into a home without needing a 20 percent down payment. And that can’t be measured in dollars alone.
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