How Can I Put Zero Cash Down And Still Buy a House?
Sometimes people make enough money to pay a monthly mortgage payment, but just can’t seem to save up a down payment. If that’s the case, there’s still hope. Both the United States Department of Agriculture (USDA) and Federal Housing Authority (FHA) provide home loans with little or no down payment required.
Is it weird that the Agriculture Department is one of the biggest lenders? Kind of. Is it another sign of government inefficiency that two federal programs compete? I’d say yes, but that’s just my Libertarian side jumping in.
So, to figure out if you qualify for a no-down-payment loan, make an appointment with a mortgage broker with all your financial information: income, employment history (length on the job and in the industry), credit information, available cash for a down payment, closing costs, reserves, and a potential co-signer or guarantor for a loan.
Under the right circumstances, you may be able to get a loan with zero out of pocket. This happens when you combine a low-down-payment loan with credits from the seller for non-recurring closing costs, cases where the purchase price is high enough to offer credit back toward the buyer (up to 6 percent), and that money is used as the cash requirement at closing.
What’s Mortgage Insurance?
Mortgage insurance is insurance that can help reduce the amount of a down payment by providing security that the monthly mortgage payment will be made. There are two types: MMI and PMI (mutual mortgage insurance and private mortgage insurance) – they behave the same way.
What’s an Escrow Account?
An escrow account is where money goes as it’s being exchanged between buyer and seller. It includes five elements:
- Mortgage insurance
- Impound for property taxes (the pint of blood we all must donate to our local government)
- Impound for insurance
Impounds are used by a lender to accumulate money to pay property taxes and insurance (like a savings account controlled by the lender for the sole purpose of paying the property tax and insurance).
Should I Get Pre-Approved for a Loan?
One of my first real estate columns covered this topic in some detail, but the quick answer is: yes, get pre-qualified. Better yet, get pre-approved. Sometimes people confuse having a good credit score with getting pre-approved. While it helps, many other factors are involved in a lender’s decision regarding a loan:
- Total income
- Length of time on the job and in the industry
- Debt-to-income ratio
- A more detailed credit review than just a FICO credit rating.
Once a loan broker reviews all this material, they will consider providing a pre-qualification or pre-approval letter, depending on the source of the information. Your heartfelt promise isn’t as secure as documents proving your credit worthiness. In a situation where multiple buyers are making offers on the same property, the one who is pre-approved will often be chosen.
What are the Differences Between a 15- and 30- Mortgage?
Apart from the obvious—15 years—the term (length) of the loan affects the rate. The pre-approval letter will determine the monthly payment the bank will approve. The amount of the loan will vary based on that amount. A variable rate loan will start with a rate that is lower than a fixed rate would be, so you’ll qualify for a bigger loan. With a 15-year loan, the rate will be lower but the payment will be higher (short term means less risk to the lender, thus the lower rate, but paying off the cost of the loan in 15 years instead of 30 means each payment will be higher).
If you have questions about real estate or property management, feel free to contact me at email@example.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.