Buying a home may seem daunting when trying to come up with the 3.5-20% deposit most lenders are asking for. Even if you try to save up as much as you can, you might find yourself in a financial pinch. Luckily, there are solutions out there, which may bring you closer to owning your dream home sooner than you think.
What are your options for avoiding a down payment?
There are several options worth considering:
The U.S. Department of Veterans Affairs has a program that provides home loans via private lenders, such as banks and mortgage companies. As long as the sale price is not higher than the assessed value of the home you’re looking to buy, VA will provide a portion of the loan, thus removing the hurdle of trying to come up with the money needed for a down payment. The eligibility requirements for both veterans and their spouses may vary, depending on the length of your service, your duty status, as well as the character of your service.
If you’re looking to buy a home in a rural area, the U.S. Department of Agriculture also has a scheme that could bring your down payment to 0%. Their Single Family Housing Guaranteed Loan Program aims to assist low to moderate-income households with a 90% loan note guarantee to approved lenders. The funds obtained this way can be used for buying either a new or an existing residential property, as well as covering repairs, refinancing of eligible loans, or the establishment of escrow accounts for real estate taxes and/or hazard and flood insurance premiums. If you are considering this option, check their map to see whether the house you’re looking to buy is in an eligible area.
Receiving the down payment as a gift
Having your parents or other relatives provide the down payment can take a huge load off your shoulders as a home buyer, and it also makes for a great new home gift. So if you’re among those fortunate enough to be able to ask your parents for help, it might be worth considering. The things to bear in mind in this case are the fact that the amount that can be gifted as a down payment may depend on the type of loan you apply for, as well as taxes.
In the best-case scenario, each parent can give their child up to $15,000, plus the same again for their spouse, amounting to a total of $60,000. This should be more than enough to cover the 3.5-20% down payment most financial institutions expect of you.
Pros of buying a home without a down payment
Needless to say, not having to worry about paying as much as 20% of your home’s selling price upfront is top of the list. This will help you redirect your budget towards any redecorating ideas you may have, as well as cover costs such as agent fees, and even moving costs, if you are relocating to a different state.
Depending on which federal programs you qualify for, there are also other perks to enjoy. For example, VA loans do not require you to take out a private mortgage insurance, even though a guarantee fee is to be expected. USDA loans can also help cover repairs or rehabilitation work on your new home, pro rata installment cost for utilities and installing measures to promote energy efficiency, and even the purchase of essential household equipment, from wall-to-wall carpeting to appliances.
Cons of buying a home without a down payment
As appealing as it sounds, buying a house without a down payment does have its drawbacks. Assuming that you opt for a U.S. federal program, there are some requirements and restrictions in place, so it’s always best to check that you meet all their criteria beforehand. With the exception of the VA loan, the USDA loan will require you to get mortgage insurance, which can often be avoided with 20% down payments.
Another very important drawback is the fact that your home will take longer to build up equity. This may affect you if you plan on moving and selling your home after 5 years, as well as affect your eligibility for home equity loans. Not only that, but you may find yourself paying more in the long run, in the shape of interest.
Buying a home without a down payment does have its appeal. If you cannot afford the 10-20% down payment most lenders will require, there are several options to consider. However, as with any purchase, it is best to weigh out both pros and cons, and above all, make sure that you will be able to afford the ensuing mortgage payments.