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A substantial down payment is not always required to become a homeowner. The common thinking is that purchasers require a 20% down payment, but there are solutions to assist you receive the keys without giving up your whole funds. Or, at the very least, very few.

True no-money-down house loans aren’t as widespread today as they were in the early 2000s. They were largely extinguished by the subprime mortgage crisis of 2007. Still, there are solutions, including the next best thing, a low-down-payment mortgage.

How to Get a Mortgage With no Money Down: Zero-down Payment Mortgages

Don’t want to make a down payment? The simplest method to avoid one is to qualify for one of the two government-backed no-down-payment mortgage programmes: USDA and VA loans.

  • USDA loans – As the name suggests, the USDA backs USDA home loans, a mortgage guarantee program for those buying a home in a designated rural area. USDA loans don’t require a down payment, but borrowers must meet credit and income requirements to qualify, and, in some cases, be a first-time homebuyer. You can verify your eligibility for these no-money-down home loans via the USDA website. Although there’s no down payment with a USDA loan, there is an upfront guarantee fee, which borrowers can roll into the cost of the mortgage. While you won’t pay any money initially if you choose to roll it into the loan, keep in mind that it adds to the balance and will accrue interest over the loan term, which means you’ll pay more overall.
  • VA loans – If you’re a military servicemember, veteran or surviving spouse, you could be eligible for a VA loan backed by the VA with no money down. There is no mortgage insurance with this type of loan, but like a USDA loan, you do have to pay an upfront funding fee, which can be rolled into the mortgage (you can reduce the funding fee by making a down payment). Another perk: VA loan lenders often offer more competitive rates for these products, which helps you save quite a bit of money over the life of the loan.

In addition to government-backed loans, you may be able to explore:

  •  a commercial lender’s initiative, which are often geared towards building communities and helping credit- or income-challenged borrowers. For example, Bank of America’s zero-down program aims to help buyers purchase property in minority neighborhoods.
  • a zero-down mortgage through your local credit union, especially if it’s one based on membership in a professional organization. These are relatively rare but are worth looking into.

Finally, don’t be too proud to ask family or friends for help. Many lenders allow you to use gift funds from a relative — and in some cases, a close friend, labor union or an employer — for your down payment. You’ll need to provide a letter from the source of the gift that shows you don’t need to pay the money back.

What Are Some Low-down Payment Mortgage Options?

If you don’t qualify for a no-down-payment mortgage, you might be able to buy a house with the next best thing: a low-down-payment mortgage. Here are some of the options:

  • FHA loans – Backed by the Federal Housing Administration (FHA), an FHA loan requires only 3.5 percent down with a credit score as low as 580. (If you have a credit score between 500 and 579, you might be able to qualify with a higher down payment of 10 percent.) It’s a popular option for homebuyers with less-than-perfect credit and less-than-plump savings accounts. Like other government-insured programs, FHA loans are offered by private mortgage lenders, so you might also have to meet a lender’s criteria to qualify. Additionally, you have to pay for FHA mortgage insurance, which adds to your monthly payment and the cost of the loan.
  • HomeReady mortgage – Available through many mortgage lenders, this loan is backed by Fannie Mae. The down payment requirement on a HomeReady loan is 3 percent, and the loan itself offers flexible underwriting. While you’ll have to pay mortgage insurance to compensate for the low down payment, it’s often at a lower price tag than what you might see with a conventional loan.
  • Home Possible mortgage – Backed by Freddie Mac, Home Possible is a similar mortgage program to HomeReady, with a 3 percent down payment requirement. Borrowers do have to pay for mortgage insurance — again, at potentially a lower rate — but also enjoy the same credit flexibilities.
  • Conventional 97 mortgage – A Conventional 97 mortgage is another government-sponsored entity (GSE)-backed program, available from Fannie Mae and Freddie Mac, that only requires a 3 percent down payment. But while it gives you a break on the cash-down, it — like most conventional (i.e., non-government) loans, does require a higher credit score: 620 at least. Also, as with other low-down-payment mortgage programs, you need to be financially prepared to pay for mortgage insurance each month.
  • Good Neighbor Next Door – The Good Neighbor Next Door (GNND) program is for borrowers who work in select public service professions — teachers, firefighters, law enforcement and emergency medical technicians — and are planning to buy a home in a qualifying area. The program, sponsored by the U.S. Department of Housing and Urban Development (HUD), provides a discount of up to 50 percent on a home with a down payment of just $100. Through the program, the borrower must qualify for a first mortgage, and the discounted portion of the home comes in the form of another loan. If the borrower continues to meet program requirements, the second mortgage won’t have to be repaid.

As home prices and interest rates climb, many homebuyers are finding it increasingly difficult to make the often-quoted 20% down payment. Don’t let the requirement for a large number of money deter you from attempting to own a home. There are numerous programmes available to assist you in purchasing a property with no money down or only a portion of the buying price.

Read Also: How to Get a Mortgage After a Bankruptcy

Compare all of your loan options, and more significantly, various lenders (some specialize in low-down-payment loans). You’ll be able to find the best bargain that fits your savings and budget if you browse around.

How do You Come up With a Home Down Payment?

Most Americans desire to own a home, but the large down payment required makes purchasing property a daunting hurdle for many.

Banks and other lenders frequently require a down payment of 20% of the home’s purchasing price. If you pay less, you must purchase private mortgage insurance (PMI). PMI is insurance that protects the lender in the event that a borrower fails, which occurs when a borrower is unable to make any more payments. When the mortgage is less than 80% of the purchase price of the home, the PMI is removed.

PMI insurance increases the monthly expenditure of cash for payments for consumers looking to buy a house. PMI payments are non-recoverable charges that do not reduce your mortgage’s principal balance. On the other hand, saving enough for 20% of a home’s buying price can take years, particularly in hotter real estate markets.

Potential homeowners have numerous choices for meeting these financial targets. Below, we will look at some of the most typical techniques for raising the funds needed for a down payment on a property.

Look for Down Payment Assistance Programs

Most people who don’t have enough for the down payment accept private mortgage insurance as a necessary evil without first checking if they’re eligible for assistance. For example, many banks have their own programs to help those looking to buy a home. It pays to check the local banks in your neighborhood.

The Federal Housing Administration (FHA) offers loans for low-to-moderate-income borrowers through FHA-approved banks or lenders. The mortgages are backed by the U.S. government, meaning the lender doesn’t have any risk. As a result, borrowers have more favorable treatment with FHA loans versus traditional mortgages. For example, you may only need to come up with a 3.5% downpayment versus the 20% that banks typically like to see.

If your credit history isn’t perfect, FHA loans may also help since borrowers with a credit score of above 580 can qualify for the program. A credit score is merely a numerical representation of a person’s credit history that includes factors such as late payments and the number of credit accounts.

Veterans and active-duty military can also get help by qualifying for VA loans provided by the U.S. Department of Veterans Affairs. VA loans or mortgages require zero down and typically offer a favorable interest rate. States also give consumers down payment assistance through a variety of programs.

The United States Department of Agriculture Rural Development offers single and multi-family home loans with zero down payments. There are also programs geared toward encouraging people to purchase homes in a particular neighborhood or region.

Tap Into Benefits for First-Time Buyers

Coming up with a down payment is particularly challenging for people who have never owned a home before, but many incentives exist for first-time buyers. Furthermore, more people qualify for these benefits than you might think. If you haven’t owned a home in three years or only owned a house with a spouse, then you can access incentives for new homebuyers. You may also be able to get these benefits if your only home is a manufactured home that is permanently affixed to a permanent foundation.

The Department of Housing and Urban Development (HUD) supports programs for first-time buyers, and some states have first-time homebuyers savings programs. With the accumulated interest, the savings accounts could potentially help some buyers save for the down payment on their homes at a faster rate than they would have been able to without the account.

First-time homebuyers can also take up to $10,000 from a traditional IRA or Roth IRA without the 10% early withdrawal penalty. What is more, there are programs to help Native American first-time homebuyers. Do not assume you cannot afford a down payment just because nobody in your family ever owned a home. Also, be aware that demanding an overly high down payment can be a sneaky way to discriminate against minorities.

Supplement Your Income With a Part-Time Job

Unfortunately, one of the consequences of the 2008 financial crisis and the ensuing Great Recession is that banks no longer offer no-income verification loans, zero document loans, or mortgages for 100% of the home’s value.

These days banks and lenders require income verification and a debt-to-income ratio of no more than about 43%. The debt-to-income ratio is a metric that measures how much of your monthly gross income goes to debt payments. For example, if you have $5,000 in gross income and make debt payments totaling $1,500 per month, your DTI is 30% or (($1,500 / $5,000) x 100 to create a percentage). Debt payments can be from a mortgage, student loans, and credit cards.

Some lenders will accept a lower down payment, but borrowers might pay for it in the form of a higher interest rate. Borrowers that put less than 20% down for the mortgage will pay PMI, which can cost nearly $100 per month on top of the mortgage payment.

As a result of the more stringent income requirements, would-be borrowers may need to get a part-time job to supplement their income. The extra money should be placed in a savings vehicle to be used only for the down payment.

Sell Some of Your Belongings

People ready to take the step into homeownership typically have a lot of stuff they’ve acquired along the way. Those things may seem worthless to the owner, but that old car or piece of furniture might be what someone else is interested in buying. Selling used goods can help supplement your income and raise much-needed cash for the down payment. The Internet makes it easy to sell everything from clothes to electronics. Some of the sites let you do it for free while others take a cut of your profit.

Downsize Your Lifestyle

If you want to free up cash to save for a home, downsizing your lifestyle could go a long way in saving money. For example, you could move into a smaller apartment or studio apartment to save on rent and utilities. If your two-bedroom apartment has a rent of $1,200 per month, switching to a $600-per-month studio will save you over $7,000 annually. If you’re a couple with two cars, perhaps selling one of them to cut down on car loans can help cut expenses. Even cutting back on dining out or buying a coffee can add up and steadily increase the amount you save.

Bottom line

As home prices climb, many homebuyers are finding it increasingly difficult to make the often-quoted 20% down payment. Don’t let the requirement for a large number of money deter you from attempting to own a home. There are numerous programmes available to assist you in purchasing a property with no money down or only a portion of the buying price. Compare all of your loan options, and even more critically, various lenders. By searching around for a mortgage, you’ll be able to get the finest price that fits your funds and budget.

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