Your first time buying a home can be highly stressful. Just starting the buying process can be hard enough. The growing costs of purchasing a home seems to be skyrocketing recently in this real estate market. Today, you can learn how to buy a house with no money down, utilizing different home loan options.
Home prices at the beginning of January 2021 were up more than 14 percent over the same month the previous year. Demand for existing homes is so strong that the average residence is on the market for less than three weeks.
Meanwhile, inventory is at a record low, causing many home buyers to feel left out. All of these factors can make saving for a house extremely difficult.
And for many first-time homebuyers, the thought of saving for a down payment and qualifying for a mortgage may feel nearly impossible. However, committing to a savings plan is a good first step. You might be able to make your home purchase move from merely a dream, to reality.
How much should you put down on a house?
Traditionally buyers put down 20% to lower their interest rate payments and prevent the incurrence or private mortgage insurance. However, 20 percent equity down is not required and many lenders are offer a variety of financing options for qualifying borrowers. In fact, the average first-time homebuyer puts down just 6%. Certain loan programs allow as little as 3% or even 0% down. If you possess a good credit report score (usually 620+) and a reliable source of income you may be eligible to receive a conventional loan with a down payment as low as 3%.
Let’s take a look at types of home buyer loans available to borrowers today who are saving for a house.
By the way, have you looked at the growing modular homes industry? It is allowing new home owners to build their own house for a fraction of the cost of traditional building strategies.
How To Buy a House With No Money
Different Loan Options Available
Certain individuals may qualify for zero down payment with a USDA or Veterans Affairs VA loan. Note that you will still be responsible for paying closing costs with cash. Some realtors or mortgage companies will offer closing cost assistance as well.
USDA loan program offers low-interest mortgages with zero down payment. They are designed for borrowers who don’t have good enough credit to qualify for a traditional mortgage. You must use a USDA loan to buy a home in an area that covers several rural and suburban locations.
A VA loan is available to veterans, service members and select military spouses.
The most popular option is a conventional mortgage, which typically requires a 3% to 5% down payment of the mortgage for a home’s purchase price. For example, a $400,000 mortgage would require a $12,000 to $20,000 down payment.
An FHA (Federal Housing Administration) loan is less-restrictive compared to a conventional loan. They are not backed by a government agency, but let you buy with just 3.5% down. FHA loans typically let borrowers qualify for a loan with a lower minimum credit score and higher debt-to-income (DTI) ratios.
Each circumstance is as different as the purchaser; the right down payment amount often depends on the individual homebuyer’s savings and investment goals. This is an extremely important variable when saving for a house.
Try to Avoid Mortgage Insurance
In general, what happens if you commit less than 20% of the value of your home purchase loan amount in cash? i.e. You are borrowing more than 80% of the value of your home. In this case, you may have to pay for some type of private mortgage insurance premium that will protect the bank and the mortgage investors just in case you default on your loan. The extra insurance usually costs between 0.2% and 2% of the loan’s principal balance on a monthly basis.
The next question you need to ask yourself is, “How much can I afford to spend on a home purchase?” The answer to this question is determined by how much money you are able to put towards a down payment. As well as how much you can afford to borrow.
This is probably the simplest part of saving for a house.
Naturally, the two questions are interrelated. In determining how much they are willing to lend, an underwriter will look at various factors. These factors include your income, current expenses, assets, liabilities and investments.
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A good rule of thumb in determining how much you qualify for is to use the 28% / 36% rule. This states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs. Additionally, you shouldn’t spend more than 36% of total debts, which include your mortgage payment, credit cards other outstanding loans.
As mentioned above, most lenders base their home loan qualification on both your total gross monthly income and gross monthly expenses. The goal for the vast majority of homeowners should rarely be to “borrow as much as possible”. Note that we are saying homeowners. Not investors who may be looking to apply vast amounts of leverage to their real estate investments.
Saving, Qualifying, and Paying
Now that we’ve discussed the basics behind down payments and loan types, let’s look at how you will afford to save, qualify for a mortgage and make monthly payments.
You need a reliable budget.
If you don’t know where and how much money you are already spending every month then you can’t possibly know how much money you can afford to begin putting towards that down payment. Look through your bank statements and credit card payments and begin to categorize the “needs” payments which include rent, student loans, car loans and utilities and the non-essential “wants” like dining out and entertainment.
This is where you can decide if you want to get serious about saving for a house. If this is a difficult task for you, there are free apps and calculators out there to assist you with this process. The Investor Weekly recommends Personal Capital above the rest.
Your savings for the down payment will more than likely begin with lowering those “wants” items from your monthly budget as you then move that savings to the “needs” side of the budget. Take comfort knowing there are many payment assistance programs available, but understand that budgeting for a home can take at least three years, maybe more.
The best ways to begin saving are to:
(1) downsize to a more affordable apartment
(2) consider rent sharing
(3) quit impulse buying
(4) give up unhealthy / costly habits
(5) limit dining out
You may be surprised how quickly those dollars can all be added to that savings side of your monthly “needs” side of the budget and the savings needed for a down payment.
Unfortunately, during the last housing market crash, many new homeowners were ignoring these steps. If you suffer from impulse buying, like many Americans do, then you might consider having your bank automatically deduct money from your paycheck to be placed into a separate savings account to be used specifically towards your down payment. Other things to consider, including paying down your highest credit card balance and reducing any outstanding loans by making an additional payment towards the principal balance without penalty. Obviously, increasing your overall credit score will never hurt.
This might all help to reduce your outstanding debt-to-income ratio that should in turn increase your chance of obtaining a more favorable appearance as a mortgage candidate. Furthermore, maybe it’s time to ask for a raise or take on a side hustle or suggest a cash present or gift card from the relatives instead of those socks or sweaters in order to help you towards your cause. Note that there are some specific rules regarding gift money and their use for home down payments that you should be aware of. There are many resources and sites out there to assist you in this endeavor. The Investor Weekly recommends “I Will Teach You To Be Rich,” by Ramit Sethi.
For more in-depth articles to help you navigate your financial journey, check our Personal Finance page out!
For more information on setting up a monthly mortgage plan, you can use our free model through the following link: Mortgage Calculator.