Buying a House With No Money Down

Buying a house with no money down was easy before the crash of the housing market. There were a number of sellers who were more than willing to help an aspiring homeowner purchase a home with virtually no down payment. Then, there were piggyback loans that were provided by the primary mortgage lender or in some cases, the owner of the property and if none of these avenues were open, the buyer could always consider purchasing Private Mortgage Insurance. Lease to own is a modified form of seller financing that was also available to people with limited finances. The aforementioned options had their pros and cons.

Piggyback loans were the most popular means of financing amongst cash strapped people who were desirous of owning a home without making the requisite down payment. Private Mortgage Insurance (PMI) was next in order of popularity. Seller financing, in case of piggyback loans, also became popular as home prices continued to escalate.

Today, piggyback loans are much harder to come by, although some lenders are still willing to consider Private Mortgage Insurance (PMI). In addition to these options, eligible borrowers can avail zero down VA insured loans and 100 percent USDA financing. Buyers, financing through state Housing Finance Agencies and certain non-profits, can use the $8000 tax credit for making the down payment on the secondary financing provided by the aforementioned entities for availing a FHA insured home loan. This again amounts to buying a house with no money down.

Buying a House With No Money Down

Private Mortgage Insurance: No money down homes have been made possible by allowing the borrower to procure a mortgage loan that requires private mortgage insurance as an alternative to the requisite down payment. Typically, the expected down payment is 20-25 percent of the purchase price of the home. PMI makes it possible for a person to obtain a mortgage loan, without paying a dime, by purchasing insurance that protects the mortgage lender in the event of the former defaulting on the loan. Of course, the borrower/aspiring homeowner is required to pay insurance premium on a regular basis.

Although the premium is tax deductible, people often preferred piggyback loans to Private Mortgage Insurance since the amount of insurance premium was generally more than the interest on piggyback loans. However, today PMI is the best bet for a person who is keen on buying a house with no money down.

USDA 100% Financing Program: United States Department of Agriculture (USDA) has a loan guarantee program that is better known as Section 502. This program is meant to provide 100 percent financing to first-time homeowners and people living in structurally unsound homes to help them purchase a home in the targeted rural areas. Income restrictions also apply. The best part about these loans, for people who qualify, is that the borrowers do not have to purchase private mortgage insurance even though the loan is a zero down mortgage. Moreover, the sellers are allowed to finance up to 6 percent of the purchase price of the property in lieu of closing costs. The rate of interest on the zero down mortgage loan is adjustable.

VA Insured Loans: The US Department of Veterans Affairs (VA) provides eligible veterans the facility of buying a home with no money down. These loans are known as VA Insured loans and are meant for all veterans as well as active military personnel in the Army, the Navy, the Marine Corps, the Air Force, the Coast Guard and the National Guard. The best part about these loans is that the mortgage is a 30 year fixed-rate-level payment obligation. Applicants with less-than-perfect credit are eligible to avail zero down mortgages that can be used to purchase single family homes, approved condominiums and townhouses.

FHA Insured Loans: Although Federal Housing Administration (FHA) insured loans require 3.5 percent down payment, the First-time home buyers tax credit of $8000 and the subsequent legislation, allowing borrowers to monetize the tax credit and apply it towards their home purchase, has resulted in borrowers being able to buy a home without making the necessary down payment. This is because people financing via state housing finance agencies and non-profits can be assisted by the latter with the amount of down payment on an FHA loan, thus providing ample scope for zero down mortgage loans. While other FHA borrowers can only use the money to increase the size of their down payment above the 3.5% minimum or use it towards closing costs. This tax credit expires on 1st Dec, 2009.

Piggyback Loans: Prior to the sub-prime crisis, piggyback loans were the most popular means of financing for a person who was desirous of owning a home without parting with the requisite amount of down payment. Although, the popularity of these loans has declined on account of these loans shouldering much of the blame for the sub-prime crisis, some mortgage lenders may still be willing to provide no money down mortgages. So here goes...

As per the guidelines issued by Freddie Mac and Fannie Mae, people who intend to buy a home by availing a home loan are required to down pay 25 percent of the purchase price of the home. The remaining amount can be borrowed from a primary mortgage lender. However, the borrower can circumvent the 25 percent down payment by obtaining a second mortgage simultaneously. In other words, the primary mortgage lender provides a loan for 80 percent of the purchase price and the second mortgage lender, the remaining 20 percent. Here both mortgages are secured with the same underlying house as collateral. The second mortgage piggybacks on the primary mortgage and carries a much higher rate of interest than the primary mortgage.

Traditionally, piggyback loans were 80-10-10, 80-15-5 or 75-15-10 loans. The first figure from the left indicates the percentage of the purchase price funded by the primary mortgage lender, the second figure is the percentage funded by the second mortgage lender and the final figure is the borrower's skin in the game. In time, the final figure was reduced to zero and resulted in no money down home loans. Thus, the borrower could easily buy a house with no money down.

The second mortgage that piggybacked on the primary mortgage was typically provided by the primary mortgage lender who gained in terms of higher interest rates, than those charged on the primary mortgage. In some cases, the second mortgage was provided by the seller/owner of the house. This brings us to the concept of seller financing.

Seller Financing: Seller financing often accompanied piggy backed loans since the second mortgage was either provided by the seller or by the primary mortgage lender.

Seller financing involves transferring the title to the house to the buyer in exchange for a note and the right to foreclose the property in the event of default. The note is pretty much like a mortgage that is paid off as a balloon payment within a period of 5 to 10 years. Since it is a mortgage, the buyer is expected to pay the seller a hefty interest on the loan. The seller in turn benefits in the form of a high rate of interest on the loan in addition to a security interest in the house.

Although 100 percent seller financing is a thing of the past, it may be possible for an aspiring homeowner to down pay less than 20 percent and still buy a home if the seller is desperate to get rid of the house.

Hopefully, the above article would have clarified the options that are available to a person who is desirous of buying a house with no money down. For further details one may refer to the article, 'How to Buy a House With No Money Down'.

In the present scenario, lease contract with option to buy is the best option for people who are interested in buying a home with minimum down payment. By paying as little as 1 to 5 percent of the price of the property, the aspiring homeowner can acquire the right to buy the house at an agreed upon price at some point of time in future. The aspiring homeowner (lessee) can then rent the house for a period of 3 years or so and pay the amount of the rent to the landlord or the lessor. At the end of this period, the lessee can buy the home from the lessor at the predetermined price or may abstain from exercising the option. Considering the present situation, most sellers are persuading aspiring homeowners to enter into a lease contract with option to buy.