My wife and I have been renting for too long. Our lease is up in December and we really want to move. We don’t want to rent anymore, but we don’t have much saved up either. Whats the deal with buying a house with no money down? I also heard you can get a mortgage that is like 106% of the house so that you don’t even need the closing costs saved up.
The only other thing I heard is to make sure we get a fixed rate if we do buy with nothing down.
Any input?
Thanks!
If you buy a house with less than a 15-20% down payment, you’ll have to purchase Private Mortgage Insurance (PMI) which you will have pay monthly until your equity reaches about 20%.
In general, if you don’t have the money for even a small down payment, you may not be ready to purchase a house. Of course, YMMV.
Zev Steinhardt
Whenever you buy a house with less than 20% down, you will be required to purchase Private Mortgage Insurance, which will increase your monthly payments. I forget exactly what this costs, but it varies with the size of the downpayment (in your case, nothing)
My only other comment about this situation is to make sure you understand all the costs of ownership so that you can make a good estimate of what you can afford (e.g. taxes, maintenance, additional commuting costs, heating costs, etc.) I made a spreadsheet of all these expenses & found it useful.
The fact that you have not been able to save anything indicates to me that you are either living very close to you limit right now, or you lack discipline (I say that as someone who also lacks discipline 
). Either way, purchasing a house is something that demands a close, hard look.
Putting less than the customary 20% down increases your long-term costs and risk (and that of others, which is why more insurance is typically required).
As far as kind of interest, it can be tailored to your circumstances. Are you likely to have increased income in the forseeable future (a medical student, for example)? Then the lowest payment you can get right now might be best, and a variable rate mortgage just the ticket. Otherwise, not so good.
Talk to your bank.
IANA Mortgage Expert, but from what I have read there are a couple of problems with zero-down financing.
First, many mortgage lenders are hesitant to make a loan without a down payment, as it is a riskier proposition in their eyes, and if you do get a loan approved, it will probably be at a higher interest rate than if you had a down payment.
Second, the more you are able to put down, the less you will be financing, and paying interest on for 30 years. A 20% down payment can make a huge difference in the amount you will actually wind up paying by the time the loan is finished.
One strategy I have heard of is to talk to your broker about getting two loans. The standard 30 year mortgage for 80 - 85% of the cost, and a second loan at a higher rate but shorter term for the down payment. This means your payments for the first few years will be higher, but over the long run you will save money, and probably be able to get better terms on your main mortgage.
It’s fairly likely you will pay more for a house if you need a 100% loan than if
you had 20% down. News of your need often reaches the seller before a final sales price is agreed to.
The seller has no concern whether you can pay or not pay the loan, but he
is concerned about getting the sales check. A 100% loan is seen by people generally as more “iffy” as to approval. This makes signing a sales contract with such a provision more iffy as well, so sellers want a higher price than they might overwise to compensate for a greater likelihood the sale won’t take place.
It so depends. How’s your current cash flow and income? Positive or are you just scraping by?
Generally, I’d say it’s a bad idea. First of all, assuming you can get the mortgage, you’re going to be paying PMI (private mortgage insurance) for years. Second, if something bad happens, you have to sell for a loss and you have no equity in the house, you’ll actually have to come up with money at the closing.
Finally, just from a pragmatic point of view, buying a house is not something you want to do without a reasonable cash cushion. If you have no savings and the furnace kicks out on you the first winter or some other unexpected repair comes up, well, then you have some problems…
As is often the case, timing is everything.
Had you followed this course of action in 1987, you very likely would have been saddled with a property that decreased in value. You could not refinance, and you could not sell until prices finally firmed up, and even then you might take a beating. It can be unpleasant. I know because I did this.
On the other hand, if you did this in 1997, you would be congratulating yourself on the best investment you ever made. I know because I did this as well.
What will happen if you do this now? Beats me.
This is not necessarily true. When I purchased my latest house we had a 80 10 loan. 10% down mortage for 80% of the house and a second mortage for 10% of the house no PMI. The second mortgage had a higher interest rate than the first.
If that happens, one of two things is true:
You are using a selling agent, and you told him too much. A selling agent legally does not represent you but rather represents the seller and has a fudiciary duty to inform the seller of facts that may be substantive to the sale, such as your financial situation. In such a case you should never tell the agent more than minimally necessary to buy a house; treat the agent as though he were the seller. (In this situation there is a listing agent who works with the seller and a selling agent who works with the buyer, but they both act in the interest of the seller. These arrangements were once standard but are becoming rarer due to the growing popularity of buyer brokers.)
You are using a buyer broker who has breached his fiduciary duty to you.
IANAR but I’ve bought and sold three homes.
If you are fairly sure that house value is going to increase (even just a few percent), then PMI won’t be an issue. We bought a house with only 6% down, and refinanced 2 years later. Even though we hadn’t built up any real equity, our increased house value meant that after the refinance we were no longer having to pay the PMI.
If none of your mortgages are financing more than 80%, you won’t have to pay PMI. On my 80/20 loans, for example, there’s no PMI. And because I had the seller pay 100% of every little closing cost, I got a check at closing (for the pre-pays I’d pre-paid).
Whatever you do, beware the magic mortgage schemes that depend on the house increasing in value. There are people out there who will lend you interest only or minimum monthly payment loans that only work if you are flipping houses and/or the value of the house goes up as predicted. Look for first time home-buyer programs, mine saved me .25% on interest for a 30 year fixed. Also, meet with a mortgage officer at your bank to get an idea of what you really can afford and take the amounts of all you debt and assets.
We bought our house with almost $0 down payment throught the FHA AmeriDream program. You’ll have to find a seller who is willing to pay your down payment (ours was 3% of the $115,000) and closing costs. We paid $300 in earnest money (that was applied to the price of the house) and ~$200 for an inspection.
In reality, a down payment was paid on our house, but the sellers paid it. Just look for sellers who will work with FHA arrangements and you’ll be fine.
I hadn’t thought about it this way, until reading yours. Frankly, the 100% loan requirement will usually be known to the seller before there is a legally enforceable contract(which has to be in writing to be enforceable.)
If you make an offer and you don’t list some unusual condition your offer is subject to, you could end up signing a contract without it, which means you either have to close period, or be liable for damages.
I was never a Realtor, but did have a brokers license for maybe 5 of my 21 years as a mortgage loan officer.
The thought of buying a house with no money down makes me nervous. You will have no equity in the house for years, if not decades. And with some lenders offering 40 year mortgages, people are really able to get themselves in way too deep.
I would be very careful. The last thing you want on your credit report is a foreclosure.
We did an 80/10/10 when we bought our first house, which avoided PMI, but that second was still a bitch. We were in a much better position for the next house, though (bought in 1999, sold in 2001).
When I was looking for my first house, I was offered this type of deal. It still sounds fishy to me. In essence, then, I take it, instead of dropping the price on the house, the seller is paying himself, right? He takes “your” down payment, which is really his money, and offers it to the bank, and, the bank looks at your credit worthiness and with the down payment, writes a check to the seller? (which can, or not, include the initial down payment).
IOW, worst case scenario, the seller is paying $3,450 for $115,000, right?
I’ll jump back in here even through I know absoutely nothing about the particular program and have been out of the mortgage business for a dozen years.
The 3% from the description is probably a guarantee fee, and if so probably everything was on the up and up. If it should have been down payment, the lender would have had to verify a borrowers account as the source(money changes hand under the table does happen and of course in illegal.)
The VA used to set the maximum interest on their home loans and it was always,
I mean always, below current market rates. How things worked, an it was legal and clearly known by everybody – the lender would charge discount fees to the seller. Before establishing a sales price, that amount would be quoted, it would be added to the sales price and the loan amount would be for the adjusted sales price. VA did not permit the veteran borrowers to pay the points(directly ha-ha).
Anyway, who is actually paying the discount points? While this amount was shown as subtracted from the seller’s check, IMO, the veteran was because he had to pay the higher loan balance. And the same thing on the FHA loan mentioned.
Let’s get real, not many seller’s are going to take less just because the buyer is a veteran or wants a FHA loan.
Do you have $5000 in the bank?
Could you raise $5000 if you needed a new furnace, roof or basement waterproofing? Gas line burst? Sewer or water line busted?
I had 2 of the above happen in my first year in a 0% down house.
My house actually became a liability… I had liability for the full mortgage balance, a contractual obligation to my mortgage lender to maintain the house and and $7500 in bills.
I had just enough money to live in that house, with no additional loans.
Once I financed $7500 worth of home repairs, my finances went into a death spiral that I’ve had no way of recovering from.
My conclusion: If you couldn’t save up 20% down, you really might not be able to afford a house. If you could save 20% down, but prefer to get a house before the time it’d take you to save for one, maybe you should save up $10K to have in reserve before you get the house.
aahala, at least since 1998 the VA rates hadn’t always been lower than prevailing rates. I went VA, 100% on my previous house, and it was a quarter point higher, plus the VA funding fee – it was 1.5% IIRC, which the seller paid. Just like my current house, seller paid everything, and I as the buyer got a check at closing. VA funding fee is non-refundable when you sell.
I went with 80/20 this time in order to not make a down payment and to avoid the VA funding fee, which I think is 2.5% at my current price range, and to avoid PMI. It’s not a matter of not having 20% down available, it’s a matter of liquidating that dang 20%. If property values fall and I’m upside down, then I can pay the 20% on the back end and still end up saving. I guess the point is, if you have the 20% and don’t plan on spending it, but can get 100% financing anyway, there’s no real reason to make a 20% down payment. If you end up upside down, just use the cash reserve.
I remember my offer documents pretty well for the current house. It was $xxxx, of which 80% by Bank1 (not BankOne) and a down payment of 20% financed by Bank2 (which is now owned by BankOne [not Bank1]). They didn’t seem to balk at all, and heck, that was a whole 20% down payment! Additionally I demanded the riding lawn mower, crappy appliances I’ve since replaced, and that they pay all closing costs up to 6% of the purchase price. And they bit. I think the clincher was having no conditions on the sale of my current home. I mean, I didn’t accept any offers on my previous house that were dependant on a prior sale. That’s messy and dangerous, and I think that my ability to be approved for four mortgages made them feel secure. Don’t get me wrong; had I not sold the other house I’d’ve been living on Ramen noodles!