Secure a Mortgage Without a Big Down Payment
The biggest obstacle for most potential homebuyers is the down payment. A standard bank mortgage will require a 20 percent down payment – unfortunately, more savings than most Americans have. The good news is, that big down payment isn’t always necessary, and in some cases, you can get a home for very little, or even nothing down. Here are a few tips on how to reduce the initial outlay.
The first and most obvious way to avoid a big down payment is to have spotless credit, a reasonable debt level and a solid job you have been at for more than a year. Bankers will love you, and will be more willing to write you a mortgage with 10 percent, or perhaps even five percent down. But, not everyone falls into this banker’s “sweet spot,” and in fact, more people are falling out of it than ever before. If you’re not in this category, don’t despair. There are still other options.
In some, but not all cases, you may use a gift or a loan from a third party to make up your down payment. FHA loans allow for 100 percent of your down payment to come from a gift, so if you are fortunate enough to have someone who wants to give that to you (think wedding present), you may be able to get the mortgage you want. Similarly, if you have a 401(k) program with your employer, you may well have enough funds in there to finance your down payment, and many loan programs allow you to use borrowed 401(k) proceeds for a down payment.
In almost every case, however, if you down payment does not meet the 20 percent threshold, you will be required to purchase mortgage insurance, which will add significantly to your monthly payment. This type of insurance protects the borrower in case you default.
Another possibility, if you have an anxious seller, is to convince the seller to carry a second mortgage for the required 20 percent down. This not only eliminates the need to put up a cash down payment; it also eliminates the need for mortgage insurance, since in this case, the first mortgage would not exceed 80 percent. Second mortgages for down payments may also be had from finance or mortgage companies, although be aware that these seconds will carry a significantly higher interest rate than the first mortgage. Also, do be aware that seconds taken out for the purpose of down payment will often have a balloon payment clause.
Homebuyers with modest incomes may qualify for a “Fannie Mae 97” loan, which requires only three percent down. The FHA has similar three percent programs. These programs do have limits, and are meant for purchases of modest homes – so if you’ve got your eye on a mansion in the Hollywood Hills, you’re out of luck on this front. Also, don’t forget that the U.S. does have programs to help its veterans, and if you’re a vet, you may be able to get a mortgage with nothing down, courtesy of Uncle Sam as a thank-you for your service.
Check with your local city and county governments as well. There are often programs available to help local homeowners, especially those who are willing to purchase a home in an area targeted for redevelopment.
Lastly, an option frequently used in areas where home prices are below average and the market is slow, is to purchase a home using a “land contract,” sometimes known as a “wraparound mortgage.” This is a private instrument between buyer and seller, in which the buyer pays the seller monthly payments directly instead of obtaining the proceeds from a mortgage company. Because you do not have to meet any bank’s qualifications, and the seller is often very motivated, these types of homes are often possible to get with no money down. Caution should be used however, since the seller may have existing mortgages on the property, and if the seller defaults, your land contract becomes void.
