100% Financing Home Loans for New and Repeat Home Buyers
100% financing home loans are mortgages that finance the entire purchase price of a home, eliminating the need for a down payment. New and repeat home buyers are eligible for 100% financing through nationwide government-sponsored programs.
Do 100% loans exist in 2018? You bet they do. And there’s a good chance that you qualify.
Never thought you could buy a home because of tough down payment requirements? Well, a number of mortgage options are available that allow you to finance 100% of the purchase price.
Many first time home buyers assume 100% loans ceased to exist after the mortgage market downturn late last decade. But some zero down home loans survived and are still available in 2018.
In this article, you will learn about a few of these loan types. You’ll probably be surprised that you can still buy a home with little or no money out of your own pocket.
Why Lenders Still Offer 100% Loans
Many new homebuyers wonder why most types of loans 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 bank, lender, or 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 lower the chances of the borrower defaulting. In fact, down payment amount is more important in determining risk than even credit score.
That’s why, years ago, the standard down payment amount became 20%. Anything less than that required some kind of insurance, such as private mortgage insurance (PMI), so the lender would get their money back if the borrower failed to pay the loan back.
Fortunately, there are programs for which the government provides insurance to the lender, even though the down payment on the loan is zero. Following are a few of these loan types.
How to Buy a House with No Money
Many hopeful home buyers ask “Can you buy a house with no money down?” The answer is yes.
And I’ll show you how.
The first step is to use a program that requires no down payment.
As stated below, there are many options, like the USDA home loan and VA loan. Even FHA can be a zero-down loan if you get gift funds to cover the 3.5% down payment (more on that below).
Not sure which loan is right for you? It all depends on eligibility.
While FHA loans are available to just about everyone who meets criteria, you need military service history to qualify for a VA loan and you need to be buying in a rural or suburban area for USDA. More on eligibility factors below.
Once you have the loan, you need to figure out how to cover closing costs.
Closing costs average anywhere from 1% to 5% of the home’s purchase price and include things like origination fees, title costs, and even property taxes and insurance that you must prepay.
So how do you pay for these extra costs? There are a number of ways.
Gift funds. You can receive gift funds from a family member, non-profit, church, employer, down payment assistance program, or other approved source. Most loan types let you use gift funds to cover closing costs.
Second mortgages. If your first mortgage doesn’t cover enough of the upfront funds needed, you can get a second mortgage. Fannie Mae sponsors a program called Community Seconds® that allows you to receive additional financing to cover your down payment and closing costs from a municipality, non-profit, employer, or another affordable housing program. You can borrow more than the home is worth in some cases, and use that extra amount to cover closing costs.
Lender credit. Lenders can issue a credit toward closing costs if you choose a higher-than-market interest rate. For example, if rates are around 4.0%, you could take a rate of 4.25% and receive thousands of dollars toward your closing costs straight from the lender.
Seller credit. When sellers really want to sell a house, they will offer a seller credit. They include in the purchase contract an agreement to help the buyer with closing costs. Sellers can typically offer between 3% and 6% of the home’s purchase price to cover the buyer’s costs. These funds can’t be applied to the down payment, but can reduce or eliminate any need to come up with closing costs.
Credit cards. You can use a cash advance for your closing costs when buying a house. But be upfront with your lender where the funds are coming from — because they will find out one way or another. 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.
100% Financing: The USDA Home Loan
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.
100% Financing: The VA Home Loan
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.
FHA Home Loans are a Zero Down Mortgage
Federal Housing Administration, or FHA, loans require a 3.5% down payment, which can be quite a lot of money. On a $300,000 home purchase, that’s $10,500. But, there is a somewhat obscure FHA rule that allows you to get around this requirement, in a way.
According to FHA guidelines, you can receive a gift for the entire down payment. The gift can be from a family member, non-profit organization, fiancé, or another eligible down payment gift source. That means you don’t need any of your own money to buy with FHA, if you can find a source for the gift.
So while the loan technically needs a down payment and is not a 100% loan, the effect is the same. If you have a gift source, you don’t have to come up with anything for the down payment.
First time homebuyers receive down payment gifts more often than you might think. There’s a chance that you know an eligible donor who could help you with all or part of the down payment.
Another FHA niche offering is the Good Neighbor Next Door loan. Teachers, police officers, and some other public employees can buy a home with just $100 down. That’s not quite 100% financing, but very close to it.
No Down Payment Mortgage
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.
No Down Payment First Time Home Buyer
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.
Don’t think you can buy a home with no down payment? It might not be as hard as you think.
A Word about 100% Loans and Closing Costs
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.
Zero Down Home Loans Are Available in 2018
Zero-down financing is alive and well. If you know about the special programs available, you can buy a home with nothing down.
To get started, speak to a lending professional who specializes in 100% mortgage loans here. Get a pre-approval for your loan so you can start shopping for a home. In 30 to 60 days, you could be moving in to the home you bought with little or no money out of your own pocket.