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6 options for buying a home with little or no money down

Shannon Lee | Improvement Center Columnist | March 21, 2016

costs to buy a home in a good school districtBuying a home is an enormous decision, one that has an impact on your credit and finances like no other purchase could. The vast majority of homes are purchased through a mortgage, but most traditional mortgages require 20% down -- and that is a big chunk of change that many potential homeowners might not have. What if you meet all other requirements but just don't have the cash for that big down payment?

Fortunately, there are numerous programs out there designed to get you into that home with little to no money down. Here are a few of the options that might work to make your dream come true.

USDA loans

Although these are often known as "rural" loans, that doesn't mean you must buy a home in the middle of nowhere -- some eligible locations are in surprisingly populated settings. Loans through the Department of Agriculture are available to those who have at least decent credit and a steady income that doesn't exceed certain median requirements. Homes in certain urban areas are not eligible. The potential homeowner must not already own a home.

There is no mortgage insurance on these loans; however, there is a 2% upfront fee, which can be rolled into the loan, as well as an annual fee of 0.5% of the loan balance. For more on the variety of program options available to homeowners, visit the USDA website.

VA loans

These loans backed by the Department of Veterans Affairs allow veterans and their surviving spouses to purchase a home with no money down and limited closing costs. The average interest rates tend to be lower than those found in typical mortgages, and credit and income requirements are more flexible. As an added bonus, these loans do not require mortgage insurance, which can greatly reduce monthly payments.

There is a funding fee, which might range from 2.15% to 3.3%, depending on the military branch in which the applicant served, as well as how many times they have taken out a VA loan. However, that funding fee can be rolled into the overall loan. To learn more, visit the Department of Veterans Affairs.

FHA program

The Federal Housing Administration has offered advantageous terms since 1934; today they are one of the best options out there for those with less-than-perfect credit. The required down payment of 3.5% is much more attainable for most potential buyers. To make things even sweeter, the FHA required insurance dropped dramatically in early 2015, from 1.35% to 0.85% -- a change that is likely to bring even more buyers into the FHA fold. To learn more about this program, check out the U.S. Department of Housing and Urban Development (HUD).

Credit union financing

Some credit unions offer low or no down payments for those with qualified credit or who meet certain criteria. For instance, the Navy Federal Credit Union offers full mortgage financing to those who are members of the military or their family members, as well as some civilian employees of the military or Department of Defense. What makes these loans different from those through the VA? The funding fee: it is 1.75%, lower than that of the VA.
Other credit unions, such as the NASA Federal Credit Union and the Travis Credit Union, also offer potential zero-down financing.

First-time home buyer program

There are numerous programs available to first-time home buyers. Sometimes these programs are offered through a particular bank or credit union, but several are offered through the government. For instance, the HomePath Ready Buyer program gives new homeowners 3% of the purchase price toward closing cost assistance upon completion of a homebuyer education course. Another option is the HomeReady program, which applies to homes in lower-income neighborhoods.

First-time buyer programs might have varying criteria, such as income limits, credit requirements, and the like. They might also be limited to homes of a certain value. In addition, some states have their own requirements. To find out what you qualify for, talk to your lender.

Remember PMI

Finally, remember that some little or no-money-down mortgages come with one big caveat: Private mortgage insurance. This typically kicks in when the down payment is less than 20% of the purchase price. Though PMI can be removed from the mortgage once a certain repayment threshold has been reached, it might drive monthly payments up significantly in the meantime. Some programs don't require this, but others do; always check with your lender to make certain which category your particular program falls into.

About the Author

Shannon Lee is a freelance writer and occasional novelist with a serious weakness for real estate. When she's not writing, she and her husband are taking road trips to explore covered bridges, little wineries and quaint bed-and-breakfast inns in their beloved Pennsylvania.