If you took a survey of adults that still lived with their parents, you would probably find that a majority of them do so because of the lack of savings they possess. Without a down payment, they assume that they cannot purchase a home and they don’t want to waste money on rent, so they remain content on their parent’s couch. The good news is that there are plenty of ways to purchase a home with little to no down payment – you just have to know your options!
20 Percent is not the Only Answer
We are all trained to think that without a 20 percent down payment, a house purchase is not possible. In reality, you can get a mortgage with no down payment with several programs, including the VA and USDA loan program, but you can even get conventional financing with as little as 3% down. The kicker is that you will pay Private Mortgage Insurance in order to give the lender a guarantee that they will not lose out on hundreds of thousands of dollars if you default on your loan. You do not have to stick with conventional financing, though; there are many other options out there that do not charge PMI and do not require large down payments!
If you are a veteran or are actively serving right now, you likely have VA benefits to use. These entitlement benefits enable you to purchase a home with no down payment. In fact, the qualifying guidelines for this program are so flexible, that it would be hard not to qualify. Typically, you need a credit score that averages around 620, although some lenders will go as low as 580; 12-months of on-time rent payments or an alternative credit line, such as insurance or utility payments; and adequate discretionary income which varies by the area that you live. The VA actually focuses more on your discretionary income than your debt ratio – they have a set amount of money that each family size needs to have each month in order to qualify.
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USDA loans offer the chance for anyone, not just veterans as the VA loans require, to purchase a home with no down payment. The kicker with this loan type is that the home must be located in a rural area, as determined by the USDA, which you can find on their website. In addition, your maximum qualifying income cannot exceed the USDA guidelines, as the program was created for borrowers that have low to middle-of-the-road income. But chances are, if you are living on your parent’s couch, you do not make too much money to qualify for the USDA loan in your area. To qualify for the USDA loan with no down payment, you must have a credit score around 620 (some lenders go as low as 580 for this program too); be an upstanding citizen; and have debt ratios around 29 percent on the front-end and 41 percent on the back-end.
Last, but certainly not least, are the FHA loans. This program does require a down payment, but it is just 3.5% of the purchase price of the home. So, for example, if you found a home that was not within the USDA rural boundaries and its purchase price was $150,000, you would have to put down $5,250 on the home. The good news is that the money does not have to come just from you – a gift from a family member, employer, or charitable organization can be used to make the down payment. As long as you can source the money and prove that it is not a loan, you can use it for a down payment. The requirements to meet the FHA guidelines are similar to those of the above two loans – your credit score should be around 620, but lower scores are sometimes accepted; your debt ratio should be around 31 percent on the front-end and 43 percent on the back-end; your employment history should be steady; and your income verifiable.
As you can see, there are a variety of ways to get a mortgage without a down payment. The 20 percent rule still applies if you want a conventional loan with no private mortgage insurance, but if you need alternative forms of financing, there are many options out there that are provided by a large number of lenders making it easy to get off your parent’s couch and into your own home!