You won’t get a conventional loan (or even an FHA loan), but you might still be able to borrow the whole cost of a house. Here’s where to look — and what to consider before you do it.

Accumulating enough savings for a down payment, closing costs, moving costs and an extra cushion of emergency savings can be the most challenging aspect of buying a home. Renters who want the stability and pride of homeownership and the opportunity to build equity in a property are sometimes thwarted by the lack of cash even if they have excellent credit and a stable income.

Here’s why: Even federally insured Federal Housing Association loans require a down payment of 3.5%. That may not sound like a lot, but on a $200,000 home, you would need $7,000 just for the down payment.

Zero-down-payment mortgage loans used to be popular when home values were rapidly rising and credit guidelines were looser. These days, almost no conventional loans are available without a down payment of at least 3% to 5% of the home price or more. However, some homebuyers may be able to qualify for a no-down-payment home loan through one of several programs.

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The caveat is that borrowers must be able to provide documentation of adequate income to repay the loan and must have good credit — at the very least a score of 620 or higher. Some lenders and loan programs will require a higher score.

VA loans
Military families and veterans may qualify for a Veterans Affairs loan, which offers 100% financing. The VA loan program has been in place since World War II and is an insurance program that guarantees loans up to a certain limit. In most areas, that limit is $417,000, but the limit is higher in counties with more-expensive housing.

To apply for a VA loan, borrowers must obtain a certificate of eligibility from a VA eligibility center. After obtaining a COE, borrowers can work with any lender that offers VA loans.

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VA loans not only do not require a down payment, but the mortgage insurance of 2.15 points (a point is equal to 1% of the loan amount) can be wrapped into the loan. Loan qualifications vary from lender to lender, but in general, VA loans require a debt-to-income ratio of about 41%.

USDA rural development housing loans
Some potential buyers who live in specifically designated regions of the country may qualify for a U.S. Department of Agriculture Rural Development housing loan. Although the loans are for “rural” areas, some eligible locations are actually near towns. Check the USDA eligibility page to find out if the area where you want to buy is a designated area.

Qualifying for a USDA home loan requires not only location eligibility but also conforming to income limitations. Borrowers can enter their ZIP code, income and number of household members here to find out if they meet the guidelines.

USDA loans are geared to low- and moderate-income households that have the income to afford the home payments but may be unable to save enough for a down payment. Minimum credit scores vary from lender to lender, anywhere from 600 to 640 or higher.

An upfront loan guarantee fee of 3.5% of the loan amount is required, but borrowers can wrap that fee into the loan balance to avoid the need for any cash at closing.

State and local homebuyer incentive programs
Nearly every state, county and local jurisdiction in the country offers some type of homebuyer incentive program. These programs sometimes offer down payment assistance, closing cost assistance or low-interest-rate home loans or a combination of those. While many are restricted to buyers by income level, some are not. Some, but not all, are restricted to first-time homebuyers. Many areas have programs designed to assist buyers in certain professions, such as teachers, medical personnel or first responders.

While not all these programs eliminate the need for a down payment, some offer a grant or an interest-free loan that will cover the entire down payment or a portion of it. The best way to find out about programs in your area is to search by state at the website of the National Council of State Housing Agencies.

The bottom line
Before you begin your search for a no-down-payment loan, be sure you can comfortably afford the payments associated with your home loan. Remember that if you do not make any down payment, you will have no equity in the property until you begin to pay off your mortgage or until the home rises in value. Be sure you won’t need to sell the property for at least three years, because it will take at least that long — or longer — to build equity.

If you have been unable to save enough for a down payment, make sure you have savings in the bank to cover costs associated with homeownership. If you have no savings at all, wait. Until you have built an emergency savings fund, you should not consider taking on the responsibilities of homeownership.

mortgage broker denver

Vince Reece
Senior Loan Officer
Office: 303-840-0966
Cell: 303-818-0699
19519 E Parker Square Dr
Parker, CO 80134

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