It could be tough to get a mortgage without making any down payment. But there are a few such options available to first-time home buyers.
Here are a few mortgage options you can try, to get mortgages at zero or low down payment:
This is a loan that is guaranteed by the Department of Veterans Affairs to purchase homes without any down payment. This loan is available to you only if you are a qualified veteran, an active military member or a member of National Guard or Reserves. You don’t even have to pay any mortgage insurance on this.
VA loans come with a funding fee (anywhere between 1.25 and 3.3 percent) that is usually adjusted within the loan amount. Nevertheless, there is an option to lower this funding fee by making a down payment.
Many private lenders offer VA mortgages across USA. A few such lenders may even get in touch with you directly by buying your details via mortgage leads. Nevertheless, do weigh your options before you say yes to any of these.
Navy Federal Mortgage (No down payment)
You can also get a loan from the Navy Federal Credit Union, which is the largest in assets and membership in the nation. Nevertheless, the condition is that the home should be your primary residence and you should be one of these:
- An active or a retired member of the military
- A civilian employee of the military or the U.S.Department of Defense
- A Family member of a military member who may have been deceased or rendered disabled during service.
This loan comes with 100 percent financing, which means you need to make no down payment. Also the funding fee here (1.75 percent) is much less than what you pay for a VA loan (Between 2.15 and 3.3 percent).
USDA Mortgage (No down payment)
The rural development mortgage guaranteed by the USDA is one of the very popular options among most home buyers. These are available to all U.S.Citizens as well as U.S non-citizen nationals, who wish to buy homes for primary residential purpose in eligible rural areas. Available at no down payment, such a loan can be used for buying single-family housing units and multi-family housing units, apart from farmland.
Before going for this option you need to check if the property you have seen comes under the eligible rural area and if you fulfill the household income criteria specified by the USDA program. These loans are meant for first-time home buyers.
Most banks offer USDA mortgages, without any requirement for mortgage insurance. Nevertheless, you may have to pay an upfront guarantee fee of 1 percent (often adjusted within the loan amount) and 0.35 percent annual guarantee fee.
FHA loan is one of the best mortgage options for first-time home buyers. However, there are certain requirements you need to fulfill if you want your FHA loan to be approved. Some such requirements that have been set by the FHA (Federal Housing Authority) include:
Steady Employment History
You may find it difficult to qualify for an FHA loan if you have been jumping jobs every now and then. A steady employment history is a must and you should have worked for your current employer for at least two years now.
3.5% minimum down payment
You should pay up a minimum down payment amount that comes up to 3.5 percent of the value of your home. This should ideally come from your own savings. If not you can take it as a gift from one of your family members.
You cannot go for an FHA loan if you are buying a vacation home, an investment property or a farm house (income producing property). The home has to be your primary residence. It is available only for 1 to 4 unit properties.
The property that you buy has to be appraised by an appraiser who is FHA approved. Not only will he determine the current market value of your house, he will also make sure it meets certain minimum standards in terms of health and safety. Based on his inspection, if there are certain repairs that are to be made, they have to be completed much before the closing date. It is fine if the seller agrees to pay for the repairs. If not you may have to spend money from your own pocket.
A minimum credit score of 580 is a must to get an FHA loan at a down payment of 3.5%. For those borrowers whose credit score lies between 500 and 579, the down payment to be made would be 10%. However, the credit worthiness of the applicant will be decided on a case-to-case basis, which might differ from lender to lender.
If you have been declared bankrupt in the past, you should have completed at least two years, by when you should have ideally re-established good credit. However, there are some exceptions to this rule. You can get an FHA loan even if you are just one year out of your bankruptcy provided you have been managing your money well and if the circumstances that caused your bankruptcy were extenuating and beyond your control.
In case of foreclosure you may have to wait for a period of three years before applying for an FHA loan, provided you have established good credit during such time. Again, if the circumstances that caused foreclosure haven been extenuating, the lender might consider your case for approval.
Debt-to-income ratio requirements
Debt-to-income ratio is one of the most important things that an FHA approved lender would consider before approving your loan application. As per FHA your debt-to-income ratio should be 31/43 in order to qualify for an FHA loan. This means your front end ratio should be 31% and your back-end ratio should be 43% of your gross income. Here is an explanation to this.
Front-end ratio takes into consideration expenses such as property taxes, mortgage insurance, homeowners insurance and your mortgage payment (along with HOA Fees). Ideally the total of these should amount to 31% of your gross monthly income or lesser. In some cases however, a front-end-ratio that is as high as 40% might be approved provided the lender is able to justify why this is an acceptable risk. Compensating factors if any need to be included in order to get such loans approved.
Back-end ratio includes your mortgage along with all your monthly debts such as your car loan payment, student loan payment, credit card payments etc. This should be ideally less than 43% of your gross monthly income. Again if the lender is successful is establishing your case as an acceptable risk, you might get approved even if your back-end ratio is as high as 50%. As for front-end ratios, including compensating factors for loan approval is a must.
Apart from the above, you need to be a lawful resident of the USA with a valid Social Security number. In case you fulfill all the above requirements, you will be eligible to get an FHA loan from any of the FHA approved lenders, some of whom might even contact you directly via FHA leads.
Most people think that VA (Veteran Affairs) loan, as the name suggests, is only for Veterans. However, this is not true. You can easily get a VA loan if you are an active duty military member. Here is how:
Find out your VA loan eligibility
The first thing you need to do is find out if you are eligible to obtain a VA loan. You don’t need years of experience as an active military member in order to get a VA loan. If you have completed 90 consecutive days of service in military, you would be considered eligible. The only thing you need to do after completing this period of time is to obtain your Certificate of Eligibility.
Although a COE is not actually mandatory to buy a home, it helps you in establishing your eligibility for a VA loan. You will need to provide a statement of service duly signed by the commanding officer of your unit/higher headquarters or the adjutant of the personnel office. This is a regular letter that is printed on the official military branch letterhead. It should include:
- Your full name
- Your Date of Birth
- Your Social Security Number
- The Date when you joined active duty
- The duration of lost time if any
- The name of the command that is providing the information
The best way however to obtain this COE within the shortest span of time is to get in touch with a VA lender who has access to the Web LGY system. This is actually an online application that can establish your eligibility and provide you the COE within a few seconds. However, this is available only if the VA has sufficient data in its records.
Using your Basic Allowance for Housing
You can use the Basic Allowance for Housing that you get from military as a way to qualify for your VA loan. Many mortgage lenders consider BAH as effective income for offering VA loan. This is generally available for active military members who are stationed in places that do not have government-provided living quarters. The amount that you get will depend on various factors such as your pay grade, the geographical duty location, number of dependents and the local rental market. At times, this can sufficiently cover your complete mortgage payment.
Fulfilling the Occupancy Requirements
The main objective behind the VA loan program is to offer veterans as well as service members, an opportunity to purchase homes that they will use as their primary residences. You cannot obtain a VA loan to buy a vacation home, an investment property or a farm house. You will have to start living in the home on a full time basis within sixty days of closing.
Fulfilling the occupancy requirement of a VA loan can be tough for those service members who are on deployment. Nevertheless, the good thing is that your spouse can fulfill this requirement on your behalf. In such a case your living and travel expenses would be taken into consideration, while evaluating the amount that you can afford for VA loan repayment.
Timing your Home Purchase
The kind of documentation that you may need to provide in order to obtain a VA loan has a lot to do with the time that you choose to purchase your home. For instance, if you are at the end of your service term, the lender would want you to provide documentation related to your pending employment as well as income plans. In case you are planning to continue with the military you may have to provide documents that show that you are intending to re-enlist or have already re-enlisted. If you are leaving you may have to provide an offer letter from your civilian employer with information about your joining date, salary, etc. The approval however, may differ from case to case and lender to lender.