Mary V. has always adored the fairytales her mother used to read before going to bed. Since then, she had been dreaming of her own place to call home, which gradually became smaller and smaller. She left behind the gold-plated palaces and castles of her childhood memories, and now, in her early 20s, she would be more than happy to live in a small cozy one-story house with a big yard, though she wouldn’t mind living in a tiny home either. Mary doesn’t want to wait too long to become a homeowner because she knows that it might be in her disadvantage. She has always thought that it is better to buy than to rent, but the major drawback for first-time homebuyers is the high down payment required for most types of home loans, which is usually around 20% for borrowers who want to avoid paying for private mortgage insurance (PMI). Stay with us as we are going to tell her more about the zero down home loans.
Keep in mind, Mary has $0 in savings. And like Mary, there are many young adults who find it impossible to put money aside while working on minimum wage. At RealEstateAgent.com, we are always looking for practical and creative solutions for all generations of home-buyers. So far, we have taught our readers how to avoid paying interest on their home loans legally, and in this article, we have asked a few real estate agents to give Mary V. the best advice on home loans with 0 down payment.
Some savings might still be required to cover the closing costs, but in most cases, making a higher offer allows the sellers to cover the closing costs. In this way, the closing costs are included in the loan and this is quite a common practice.
It is said that good things come to those who wait, however, in real estate, it isn’t always true. For example, postponing the first mortgage until past your 30th birthday may get you into more financial troubles and you may no longer qualify for a conventional mortgage. Why? Because you didn’t have the financial maturity to live within your means. You might have also relied too heavily on credit cards. Becoming over-indebted is easier than you think. So, in that situation, late payments or missed payments would be lowering your credit score. While there are home loans for people with bad credit, they usually come at a higher cost. But the good news is that zero down home loans are also available for those with a low FICO® Score.
So what options does Mary have for zero down home loans?
Don’t let yourself be misled by the word “rural” - loans offered through the US Department of Agriculture cover areas that some real estate agents may not regard as rural. The best part is that USDA loans offer 100% financing for buying or building a primary residence. So, Mary V. may qualify for an USDA loan if her annual income is below $82,700. Even if she got married, the limit would be the same. However, as a single female, Mary stands a higher chance to qualify. She does need a steady income and strong personal finances, such as no missed payments in the previous year or a credit score of no less than 640 or 620, according to some lenders.
Mary V. may choose anything between a new construction, townhome or condo, manufactured homes or distressed properties (such as foreclosures and short sales) not too far away from major urban areas. “She has to look at towns and cities with very good public transportation if she doesn’t mind spending some time commuting. After all, who said you cannot be productive while moving from point A to point B?” said one of our real estate agents in Chicago.
If Mary decides to buy her first home before she gets married, then she will not have to split it with her husband in case they part ways. “Divorces hit the real estate markets very hard. As a real estate agent, I handle all kinds of family situations, but the fight over who keeps the house is extremely fervid. So, Mary, do yourself a favor and buy your own property with a USDA before you tie the knot,” concluded our Chicago real estate agent.
Probably the oldest benefit that military personnel has enjoyed is the VA loan - a home loan that is guaranteed by the US Department of Veteran Affairs. Now, Mary V. doesn’t work in the military, but she can make her way in the system by getting married to an active duty service member or to someone who has been among the reserves or in the National Guard for at least 6 years. “Falling in love with a guy who works in the military is the easy part. Keeping a strong marriage afterwards will be more challenging, as those in active duty may be relocated or deployed overseas,” said another agent listed on RealEstateAgent.com.
The main positive aspect of working in the military is a stable income. Moreover, when applying for a VA loan, most lenders must leave enough residual income to allow a decent living for the borrowers. A debt-to-income ratio of up to 41% is considered acceptable, while the credit score must be at least 580.
“If Mary is wise, she would convince her husband to purchase a multi-family house from the beginning. They must get the maximum benefit out of this opportunity. So, they can purchase a property with a maximum of 4 single-family units; they may use one as their primary residence, and find tenants for the remaining three units. The property almost pays for itself, even if they were to move to another city. Contracting a second VA loan following a military reassignment may be possible, as well, even if the previous one is not paid in full,” further explains our real estate agent.
Mary V. may benefit a lot from joining a credit union. Most credit unions impose a maximum debt-to-income, but there might be no minimum income required. Other credit unions make homebuyer education classes mandatory or may only finance real estate in a particular area. So, it may take a while until she finds the right credit union for her housing needs. Fortunately, a great place to start the search is www.mycreditunion.gov - a very user-friendly website where everybody can find more about credit unions and even locate one near them.
Fannie Mae has found that not being able to save money for a down payment is the primary barrier for would-be homeowners. Consequently, with the new 97% loan-to-value loans it tries to make homeownership more affordable for those with low income. FHA loans only require a 3.5% down payment as well. Now, you will say that we are crazy for including these loans here. But, wait a second! What if Mary’s parents offer to pay the downpayment as a gift? Then, she has nothing to worry about. She has managed to secure a zero down home loan!
“As a first-time home buyer, Mary may tap into her IRA account and withdraw up to $10,000 to use as a downpayment for her house with no penalty. You may say that this is ‘free money’ and for those with no savings, it’s a blessing. So, she may look for properties with a market value of around $300,000,” explained a REALTOR® listed in our online agent directory. For both loans, PMI is mandatory, though, until the borrower repays about 80% of the loan.
One more trick: if Mary had siblings, they may buy her out. She may receive her share in their parent’s house in cash, using that money as a down payment for a loan. So, even with no savings, she can become a homeowner with the help of a “pseudo” zero down home loan. Of course, this process can be done even after their parents die, but Mary may still be included in the will and inherit other properties as well.
There are lenders who are willing to lend money to doctors and lawyers without asking for a down payment. “When choosing her career, Mary V. should take into consideration the fact that there are lenders open to finance a home purchase for individuals with no savings, but who have a very high income. Doctors and lawyers invest a lot in their education, they may even have student loans on top of their credit cards, but the starting salary is quite high. For example, a lawyer may enter the job market with a starting salary of over $100,000 per year,” points out one of our real estate agents. So, with a Juris Doctor degree in hand, Mary could start looking for a JD Mortgage. The main advantage of this kind of loan? No PMI, no down payment, and the closing costs may be covered by a gift from parents. The debt-to-income ratio, though, is only 38%.
Doctors and family physicians also start at more than $100,000 per year, so they may qualify for a Physicians Mortgage Loan. The default rate among doctors is only 0.2%, so lenders are open to lending money to a person with a good and stable income, on an ascending career path. However, a good credit score may still be required.
With all these tips, Mary V. should be able to find the best zero down home loan that suits her needs and financial possibilities. Once in her dream home, she may start to dream about becoming a real estate investor. The sooner, the better. In real estate, procrastination is a great enemy, especially now that you know all the home loans with 0 down payment which you can access. Pick up the phone and call a real estate agent today!