3 Ways to Avoid a Down Payment
If you’re looking to buy a house soon—but you’re being put off by the thought of saving enough money for a down payment—it’s your lucky day. We’re going to go over ways someone can still purchase and get into a house while avoiding a down payment.
The common myth you might have heard before about needing 20 percent down to buy a house has long been perpetuated— that just isn’t the case anymore, and it’s also possible to get into a home without having to put any money down upfront, at all. How? Let’s get into it.
What’s a Down Payment?
A down payment is a percentage of the sale price of the home you are buying that you pay upfront to receive a home loan. It varies depending on the cost of the home you are trying to buy. For example, if you were to put 3.5% down on a $350,000 house, you’d have to have $12,250 to put down. The percentage you are required to put down can also depend on the loan you’re using, your credit score, and other factors. As we said above, there are some loan programs where the percentage required to put down is 0.
Where Did the 20 Percent Down Payment Myth Come From?
Like most myths, there is some truth hiding in the origin story. While it is not true that you must always put 20 percent down, there is a reason 20 percent down is suggested by some uninformed people, and that reason is mortgage insurance.
While only applicable for certain loans, mortgage insurance is applied to your overall mortgage payment every month, and you’ll pay it until you reach a certain amount of equity in your home (for Conventional loans, 20 percent equity.) This is just because a lower down payment can be a bigger risk to the lender, so insurance is applied.
However, you should know that mortgage insurance is not scary—especially when you work with us—because we work with private mortgage insurance companies with competitive rates. It’s not too expensive these days—and goes away eventually. It could actually be seen as a positive thing because it allows people who don’t have huge sums of money saved up to put down still get into the homes of their dreams.
Now you know where that 20 percent idea comes from and why mortgage insurance is not inherently a bad thing. Unfortunately, this myth can still scare off a lot of first-time home buyers, especially with rising housing costs. Many people see the down payment as a hurdle to home-buying and are unsure if they’ll ever get there.
But don’t let the fear of saving up for a down payment put you off from your dream of buying a home because the wait to save up 20 percent can keep you out of the market for longer (not building equity in the meantime) or limit the amount of money you have on hand for furniture, upgrades, or other miscellaneous costs that come with buying a home — or even the expenses that pop up in life in general.
If you’re looking to avoid the down payment altogether, you have three options:
Rural Development Loan
The Rural Development loan, also called a USDA loan, is a great option for people who are looking to avoid a down payment. This program is specifically for Iowa buyers who are looking for a community of 20,000 people or less, but it does not mean you are far from more populated areas! Towns such as Tiffin, Kalona, Swisher, Newton, Washington, Williamsburg, Solon, Grinnell, Atkins, Palo, and many more are all eligible.
To take advantage of the Rural Development Loan program, you must meet the following eligibility requirements:
- Occupy the home you’re purchasing as your primary residence
- Be a U.S. citizen or permanent resident
- Meet standard credit criteria (640 or better credit score)
- Make gross wages within the 2023 USDA Income Limits
In order to qualify for a USDA loan, you pay a guarantee fee (similar to mortgage insurance). A 1% guarantee fee is charged upfront and financed into the loan, as well as a small monthly fee added to your monthly payment. But these are both less than a down payment would be—and you don’t have to spend years saving to get into a nice home.
If you’re interested in buying a home in an eligible area, or you have any further questions on the Rural Development Loan, please feel free to contact us or reach out. Home buyers who are looking to avoid a down payment should look more into the advantages of this wonderful loan program.
If you are eligible for the VA loan, it is one of the best loan programs that does not require a down payment – even with down payment, the VA loan is typically the best option, but a huge perk is the ability to put zero down. This loan program is reserved for qualified service members, and the benefits of the loan program are well deserved! Another benefit is that there is no monthly mortgage insurance at all—ever! So not only can you get in the home with no money down, you don’t have to pay any mortgage insurance.
You may have to pay a small VA Funding Fee; however, some veterans are exempt from the fee if they have a 10% or greater service-connected disability.
The biggest perk? Many veterans are eligible for the $5,000 Military Home Ownership Assistance grant!
Who is eligible for the VA loan?
- Anyone who has served on active duty that has a discharge other than dishonorable
- Active Duty military members
- OR has served six years in the Reserves or National Guard
If you want to learn more about the VA loan, contact us today. We LOVE doing VA loans, and we’ve done them forever!
Conventional or FHA Loan Paired with the IFA Assistance Program
Typically, the lowest down payment needed for a Conventional loan is 3%, and for an FHA loan, 3.5%. However, the Iowa Finance Authority (IFA) has a 5 percent assistance program. This is 5 percent of the purchase price of your home. This is HUGE! The money can be used to cover your down payment, so if you are using a Conventional or FHA loan, you can get into a home without any money out of your pocket for down payment.
Actually, this assistance program can be paired with any loan option! So even if you are qualified for a VA loan or a Rural Development loan, you can still receive this 5 percent assistance to cover any other costs such closing costs or prepaids. The only catch is that you need to work with an IFA-participating lender—which we are! In fact, we are preferred lenders because of the volume that we do with the program.
So, if you are ready to leap over that down payment hurdle between you and your dream of owning a home—reach out to us today. There are several ways we can bypass the down payment altogether and get you into the home of your dreams. We’d love to help!