Buying a home with no down payment.
The Lawhead Team recently came across an article form money.msn.com which discusses buying a home without a down payment:
With home prices and mortgage rates as low as they are, a lot of people are considering becoming first-time homebuyers. Unfortunately, many of them are discouraged by a perceived need to come up with a hefty down payment.
While the free-money days of the housing boom — when virtually anyone could get a mortgage with little or no money down — are long gone, there are still ways for qualified borrowers to get a mortgage with a small down payment. And qualifying may not be as difficult as you think. In fact, if you know where to look, it’s still quite possible to get a mortgage with no money down.
Here’s a look at the major options. Note that these options are not affected by the new mortgage rules issued by the Consumer Financial Protection Bureau on Jan. 10. Those rules set certain standards for borrowers’ financial qualifications for getting a mortgage, but the size of the down payment was not among them.
FHA mortgage – The Federal Housing Administration is the first place most new homebuyers should look when contemplating a low-down-payment mortgage. The FHA requires a down payment of as little as 3.5% — with attractive mortgage rates and credit requirements that are fairly generous as well.
The downside of an FHA mortgage is that the fees — actually FHA mortgage insurance — can add up. Currently, borrowers pay a one-time fee of 1.75% of the amount borrowed as an upfront mortgage insurance premium at the time they take out the loan. In addition, there’s an annual insurance premium of 1.20% to 1.25% on 30-year mortgages.
So in the first year, you can end up paying nearly as much in mortgage insurance as you paid for a down payment. However, you can roll the cost of insurance into the loan, so you’re paying it on a monthly basis over time, rather than having to come up with it all at once, as you would with a down payment.
Interest rates on FHA mortgages also tend to run a bit lower than those on conventional 30-year home loans, which helps balance out some of the cost of the insurance premiums. If you had a conventional mortgage with a down payment of 5% to 10%, you’d still have to pay private mortgage insurance annual premiums of 0.78% to 0.90% of your loan amount, so the difference isn’t as great as it might first appear.
VA loans – For veterans and others who qualify, a mortgage backed by the Department of Veterans Affairs is the best deal around. Not only is it one of the few ways you can still get a mortgage with no money down, there’s also no requirement for mortgage insurance, since that cost is picked up by the U.S. government. The interest rates also tend to run lower than on conventional mortgages, because the government is taking on part of the risk.
Generally, VA loans are available to all active-duty and honorably discharged members of the armed forces, including the Coast Guard and members of the National Guard or Reserve who served at least six years. Surviving spouses of service members killed in the line of duty are also eligible.
You do have to pay a funding fee of 2.15% of the loan amount if you take out a VA mortgage with no money down. However, that fee can be rolled into the loan amount, so you don’t have to pay it upfront. You can avoid the funding fee entirely by making a down payment of at least 3.5%.
VA mortgages officially have no minimum credit score requirements, but in practice, the private lenders who handle VA loans will require a FICO score of 620 or higher.
Navy Federal Credit Union – Unlike other options on this list, the Navy Federal Credit Union is an actual lender, a credit union that originates mortgages. It’s also one of the few lenders that still offers no-down payment mortgages on its own initiative.
The membership guidelines for NFCU are similar to the eligibility guidelines for a VA loan, with some key additions. In addition to active-duty or retired members of the armed forces, civilian employees or contractors working for the Department of Defense or at DOD installations are eligible for membership, as are enlistees and officer candidates.
In addition, you qualify if you’re a family or household member of any of the above. So if your grandfather is a Marine receiving an annuity from the DOD, or you have a sibling who’s serving in the Army, you’re eligible.
Of course, you have to join NFCU to obtain a mortgage or other loan through it.
NFCU offices are concentrated in the Washington, D.C., area, though mortgages can be originated nationwide. The credit union also has branches on many military posts, as well as branch offices in nonmilitary locations spread across the country.
USDA mortgage – This is a fairly obscure mortgage product — many people aren’t even aware of it. But if you don’t have a military connection, it may be your best bet for a no-down-payment mortgage.
These loans are offered through the U.S. Department of Agriculture’s Office of Rural Development. Technically, these can be used only to buy a home in a rural area. But the definition of “rural” for these loans is pretty generous, and it includes many communities that most people would consider suburbs.
The eligibility standards for these loans are more limited than for other government-backed mortgages. They’re available only to people with low- to moderate incomes, generally defined as 115% of the local median income or less. Adjustments for family size can increase this figure quite a bit.
The loan maximums are lower than on FHA or VA mortgages but generally are adequate for buying a starter home in a decent neighborhood. To qualify, applicants must be without adequate housing, although that can simply mean that your family has outgrown your present apartment.
Borrowers pay an upfront guarantee fee of 2%, which can be rolled into the loan amount. There’s also an annual mortgage insurance fee of 0.4%, which is billed monthly as part of the mortgage statement. Again, 100% financing is allowed.
Funding for the program is limited, so you may have to go on a waiting list before being accepted. To initiate the process and find participating lenders, contact a USDA Rural Development office in your state.