Buying a home should be an exciting process. It’s an expensive process but it should also be a great process. In today’s market, it is unrealistic for many to come up with 20% down on a house. On a $200,000 home, that is a down deposit of $40,000. For those who don’t have a 20% deposit, there are a number of low down and zero down options.
I have owned five times in my life time. The first house that I purchased was my family home. My sister purchased our family home from our parents. When she moved out of the state I rented from her and then I purchased the home.
The first step I took was to get pre-approved by a financial institution. I was very fortunate that my first loan officer knew I was new to the buying game and walked me through the home buying process. At the time I purchased my home I had no money and I had no idea about interest rates.
When you purchase a home you are to lock in an interest rate once you finalize the pre-approval process. The interest rates were dropping at the time I made contact with my loan officer so he told me to hold off and to watch the news for information on interest rates.
I asked my loan officer if he had any zero down options since I was a first time home buyer. He told me he did but was pleasantly surprised that I was already living in the home I was purchasing and that I was buying the home from my sister. He asked me if my sister would be willing to give me a gift in equity for my down deposit.
A gift in equity occurs when a family member sells a home to a family member the seller has had a previous relationship with at a price below current market vale.
My first mortgage ended up being $94,000. My loan payments were about $700 per month. My previous rent was $400. This increased my payments from renter to owner from $400 to $700 or a $300 difference. I eventually did a cash out refinance on the home and took out equity so I could pay off some of my student loans.
I have never put 20% down on any home I purchased. The most I’ve put down is 3.5%. The house that I currently own is in the city of Atlanta. Because I purchased in an area that is being gentrified, I put 3% down program, got a reduced interest rate and got a reduced private mortgage insurance rate (if you don’t put 20% down you are required to pay PMI).
A lot of inner cities have programs where they are trying to get people to move in and revitalize the area. Many cities and states have first time home buyer programs and other programs for which you do not need to be a first time home buyer in order to buy a home and participate in many of these programs.
There are also a number of grants and programs to help new homeowners buy their first home.
- FHA Loan- with an FHA loan, the Federal Housing Administration insures the mortgage. You must have a credit score of 580 or higher for the loan and need at to have a down deposit of 3.5% of the purchase price. With an FHA loan, if your score is lower than 580 you may be able to still qualify for the loan but have to put down a larger deposit.
- USDA Loan- the U.S. Department of Agriculture (USDA) has a homebuyer assistance program. While the program focuses on homes in certain rural areas you don’t need to buy or run a farm to be eligible. The USDA guarantees the home loan and there may be no down payment require.d Applicants with a credit score of 640 or higher get a streamlined process for the loan while those with lower than 640 will have to provide more documentation for the loan.
- VA loan- The U.S. Department of Veterans Affairs helps active-duty military members, veterans and surviving spouses buy homes. The VA guarantees part of the loan. VA loans come with competitive interest rates and require no down payment. Private Mortgage Insurance (PMI) is also not required.
- The Good Neighbor Next Door Program, which is another HUD program, provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th grade teachers. Buyers can also receive a 50% discount on the listed price of the house.
- Fannie Mae or Freddie Mac- these are government sponsored entities and they work with local lenders to offer mortgage options that benefit low and moderate income families. The down payment is as low as 3% . Fannie Mae also provides homeownership education for first time home buyers through its “HomePath Ready Buyer” program.
- Energy Efficient Mortgage- this is designed to help you add improvements to your home to make it more environmentally friendly. The federal government supports EEM loans by insuring them through the FHA or VA programs.
- FHA Section 203k loans- this is a rehabilitation loan backed by the federal government. You can purchase a fixer upper and build the home to your desire. The down payment is 3%.
- Native American Direct Loan- This is a program for Native American Veterans and their spouses so they can buy homes on federal trust lands. The Veterans Administration serves as the lender. If eligible, buyers wont’ be required to make a down payment or pay PMI. The first time homebuyer loan also offers low closing costs and a 30 year fixed rate mortgage.
Also, if you are looking for a very low down mortgage loan, Quicken Loans, has a 1% down loan payment. This is only for purchases and not for refinances of mortgages. Quicken Loans gives the buyer a 2% grant for a total down of 3% the purchase price. The buyer must have a credit score of 680 or above, earn less than the median income for their county and must carry a debt-to-income ratio of 45% or less.
All cities and states have first time home buyer programs so it’s worth taking the time to do your own research.