As of January, the median sales price for an existing (i.e. not new) home sold in the U.S. was $228,900, accordingto The National Association of Realtors. Conventional wisdom would have you paying 20% down, or a hefty $45,780, when taking out a mortgage for such a dwelling.
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What if you don't have the income or the savings to do that right now? Well, you do have a few options.
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A VA Loan
If you're a qualifying veteran, a military service member on active duty, or one of certain National Guard and Reserve members, you may qualifyfor a home loan from The Department of Veterans Affairs (the VA), with no down payment required.
These loans originate from private lenders such as your local bank or credit union, and are then guaranteed by the VA. Unlike non-military homebuyers, who typically need to buy private mortgage insurance (PMI) if they're putting down less than 20%, there's no PMI required.
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There is a "funding fee" -- which can be paid upfront by the homebuyer, or can be added to the borrowed sum. The funding fee is between1.25% and 3.3% and depends on whether it's your first time taking out a VA loan, your military status, and how much you're putting down. A first-time veteran borrower with a down payment of 10% will be charged 1.25%, while a reservist making no down payment on his second VA loan will be charged 3.3%.
The maximum loan for this program is the sameas the conforming loan limitfor the Federal Housing Finance Agency, which is $424,100, recently upped from $417,000. This can affect how much house can you afford. In some pricey regions, the limit is a bit higher.
To start the process, you'll need to get a Certificate of Eligibility (COE). You can obtainit online, via the VA website, or your lender may be able to help you secure it. You can also get it through the mail. You'll need to produce a bunch of documentation supporting your eligibility, such as a statement of service, or a DD Form 214.
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A Navy Federal Credit Union mortgage
Another option for buying a home without a down payment is getting a mortgage through the Navy Federal Credit Union, if you can. It's the largest credit union, and if you're a member buying a primary home who qualifies, it will offer you 100% financing. That may sound simple, but most people who might want to take advantage of this opportunity can't -- because the credit union only accepts as members military people, some civilians who work for the military and the Department of Defense, and military family members.
If you think you might qualify for membership, take a closer look. Remember, too, that many times, you'll get a better mortgage deal from a credit union than from your favorite bank. Even if you don't get a 0%-down loan, it could be worth looking into.
For those who do qualify, this credit union offers a deal that can be even more enticing than a VA loan -- because its funding fee is just1.75%. That fee even can be waived if you add 0.375% to your loan's interest rate. (Be sure to crunch the numbers, as paying the 1.75% upfront can make more financial sense depending on your situation.)
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A USDA loan
One more option to consider is a Rural Development Guaranteed Housing Loan -- sometimes called a "Section 502" loan -- from the U.S. Department of Agriculture (USDA). Importantly, it's not just about farmland -- it covers many areas both rural and suburban. In fact, about 97% of America's acreage is eligible.
The USDA website offers a map of the U.S. showing eligible and ineligible areas. Here are some things to knowabout the program:
- Many people don't know about this loan. It's relatively new, has recently been expanded, and many lenders don't advertise it.
- For eligible homebuyers, there's no down payment required.
- The loan is targeted to low- and middle-income homebuyers. Along with a home's location, your income will also determine whether you can take advantage of this loan.
- Interest rates offered on USDA loans tend to be lower than rates you'll find elsewhere. If your credit score is average, you may be offered rates as much as a whole percentage point lower than a conventional mortgage's rate. One reason they're lower is because the loans are guaranteed by the USDA.
- There are ordinary closing costs involved, there are no prepayment penalties on loans, and the loans can be refinanced later.
- Only fixed-rate mortgages are offered -- no adjustable-rate mortgages (ARMs).
- The program is not limited to first-time homebuyers. If you're buying your fourth home, you may still be eligible.
- There is some mortgage insurance required, and it's paid at closing, when it's added to the amount you borrow. The insurance fees for USDA loans are lower than the funding fees for the other kinds of loans described above. Here are the rates -- which were recently lowered:
Kind of Loan
1% upfront fee
1% upfront fee
0.35% annual fee
Source: USDA website.
A key thing to note about USDA loans is that its funding and future is rather dependent on Congress, and it has run out of money in the past before getting a new infusion. If you're interested in this loan program, learn more about it -- and some other loan options offered by the USDA -- and consider acting quickly, if possible.
The big picture
There are some other low-cost optionswhen buying a home, such as the HomeReady program that accepts just a 3% down payment. Many states and cities have their own programs offering incentives and assistance to homebuyers, too.
Paying little to nothing down can be great, helping you get into your own home sooner, and right now, letting you lock in historically low interest rates -- but it's not always perfect. It also puts you in greater danger of ending up with an "underwater" loan, where you owe more than the home is worth if home values fall.
Learn more about homebuying, and you'll likely find more ways to save and reduce headaches -- such as by getting pre-approved.
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