How to Qualify for a No Down Payment Mortgage
You
want to buy a house. You have a good job and a high
credit score, but you don't have a down
payment (or money for closing costs). Can you buy a house without a
down payment and no closing cost money? Maybe. All of the popular mortgage
programs allow "donors" to give you money for the down payment and closing
costs. Eligible "donors" include a close friend with a clearly defined
and documented interest in the borrower (i.e. fiancé), relative, or
a charitable organization (i.e. church), municipality, or nonprofit
organization as a gift.
The lender will require extreme documentation showing the money transfer
from the donor to the home buyer's bank account. Do not accept
cash from a relative or any other acceptable "donor", because
the lender is unlikely to recognize the gift money. The money transfer
must be made by check or wire transfer and the donor must sign off on
a lender provided "gift letter". If you need gift money for the earnest
money deposit, speak to a lender in advance of the purchase to document
the earnest money deposit.
TIP
If you're not able to find one "donor", try to find multiple donors
to meet the down payment and or closing cost requirement. If the parent(s)
will pledge 50% of the down payment, ask your brother, sister, aunt,
uncle, grandparent(s) to each pledge a portion of the down payment and
closing costs. Each donor will be required to sign a separate gift letter
and provide bank statements.
Low and no down payment mortgages
- USDA - "0" down payment
- Veteran Mortgage - "0" down payment
- FHA mortgage - 3.5% down payment (can be gifted)
- Conventional loan
-
Conventional
97 - 3% down payment
- HomeReady - 3% down payment
USDA home loan down payment
The
USDA home loan program was created by the United States Department of
Agriculture to help low to moderate income house buyers in rural, under
served areas in the United States buy homes. The USDA loan does not
require a down payment (100% financing) and the seller is permitted
to pay a large percentage of the home buyer's closing costs. If the
seller refuses to pay the home buyer's closing and escrow costs, all
(or part) of the cash requirement for closing can be paid for by a close
friend, relative, or a charitable organization (i.e. church), municipality,
or nonprofit organization as a gift. The lender provided "gift" letter
states that there are no repayment arrangements and that all money transferred
to the home buyer is purely a gift to facilitate the purchase of the
house.
The USDA requires the mortgage lender to document that the "gift"
money has been transferred to the borrower's account and show proof
of the transfer of the gift funds from the donor's account. The lender
may want a copy of the donor's canceled check or withdrawal slip and
the borrower's deposit slip. The donor may give the closing agent a
certified check for the amount of the gift when the money is not transferred
prior to settlement. The lender will require a copy of that check (or
a settlement statement) showing receipt of that check from the donor.
The USDA also permits an unsecured loan from a bank, family member,
or credit union, or even a credit card cash advance. A word of caution,
DO NOT borrow money or obtain any money for eligible donors without
first speaking to a loan officer. Any cash transfers must be documented
carefully by the lender. Read more about
USDA Loans
Veteran loan down payment
The
VA home loan has been around since the end of World War II to help qualified
veterans buy a house. The Veteran's Administration does not require
a down payment and the seller is permitted to pay all closing costs
on behalf of the veteran. Eligible "donors" include a close friend with
a clearly defined and documented interest in the borrower, relative,
or a charitable organization (i.e. church), municipality, or nonprofit
organization as a gift. Read more about
VA Loans.
FHA home loan down payment
The Federal Housing Administration (FHA) requires a modest down payment of 3.5% for a single family home or an FHA approved condominium. The down payment can be paid by the home buyer or can be paid for by a close friend (with a clearly defined and documented interest in the borrower), relative, or a charitable organization (i.e. church), municipality, or nonprofit organization as a gift. The donors may also pay any and all closing, prepaid and escrow costs. The mortgage lender will require a gift letter acknowledging the money transfer from the donor/giver to the home buyer. The lender will also require a bank statement from the donor's account acknowledging the source of the gift money and a also provide the lender with a withdrawal slip and an updated bank statement certifying the receipt of the gift money.
Conventional loan down payment
The
conventional loan is a mortgage that meets the underwriting and lending
guidelines of the Federal National Mortgage Association (Fannie Mae)
and the Federal Home Loan Corporation (Freddie Mac). The conventional
home loans are (technically) not backed by the Federal government. Fannie
and Freddie permit donors to pay for the down payment and closing costs
for the home buyer, however, the entire down payment of 20% is required
for a no down payment mortgage. Read more about
Conventional Loans
Down payment and closing cost assistance programs
Many states, counties and cities have down payment and closing cost assistance programs. The best way to track down payment and closing cost grant money is to call a HUD Approved housing counseling agency for information on available programs.
The Federal Home Loan Banks provides the grant money to applicants whose household income is at or below 80% of the area median income. See Federal grants for first time home buyers
Down payment gift tax implications
There is an IRS gift tax. As of 2015, a married couple filing a joint return can gift up to $28,000 to a child or other family member or give up to $14,000 to any one person without incurring the gift tax. The tax is paid by the person donating the money. Consult a tax professional for the tax implications of down payment/closing cost gift tax for complete information
Frequently
Asked Questions About No Down Payment Mortgages
Q. How to buy a house with no down payment?
A. Assuming you are not a veteran and your income and/or purchase
location does not meet the USDA guidelines, then obtain a monetary gift
for the down payment from an eligible donor and apply for an FHA, HomeReady™
or Conventional 97 loan. You should also hunt for a first time home
buyer assistance program through the city, county or state.
Q. How much is a down payment without PMI?
A. A down payment of 20% is required to avoid the dreaded
private mortgage insurance (PMI) charge.
Q. Should I get a loan for a down payment?
A. That's a big no, no. The mortgage rules prohibit borrowing
money to be used for the down payment or closing costs. That's one of
the reasons lenders want to review your bank statements. They want to
find out if there is a large deposit which could be a loan.
Q. What is the lowest down payment for a conventional loan?
A. The lowest down payment mortgages for a conventional loan
are the HomeReady and Conventional 97 programs. Both loans require a
3% minimum down payment.
Q. What is a down payment example?
A. Let's say you're purchasing a home for $100,000 and the
down payment is 3.5%, multiply $100,000 by 3.5% and the result is a
$3,500 down payment.