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How to Buy a Home Without a Down Payment
Mortgage rates are rising and it's becoming more difficult for
a prospective buyer to save up for the necessary down payment.
Fortunately, there are ways around this hurdle.
Although homebuyers were once required to put down 20% of the
purchase price, those times are long gone. Generally, lenders now
require 3 to 5 percent down. The problem then becomes how to save
up for that 3 percent.
What many don't know is that they have several options for
coming up with the money.
RETIREMENT SAVINGS
Most 401 (k) or Individual Retirement Accounts will allow
people to borrow or withdraw money early. Doing so can be a good
strategy for the home buyer. With a 401 (K), one can borrow up to
$50,000 or 50 percent of the balance, whichever is less, and then
repay a loan over five or more years, with interest. The added
advantage is that this type of borrowing won't count as debt when
a lender is assessing a person's qualifications for a loan. And
there is also the possibility of getting better appreciation on
money invested in real estate.
But, are there drawbacks from borrowing from a 401 K? There
can be. For one thing, if the borrower quits or gets laid off
from the job, he must repay the loan within 90 days or be
subjected to penalties and taxes on the early disbursement.
GIFT MONEY
While borrowing against retirement savings is possible for
people who were able to set money aside, there are many people
who have little or no savings.
What many don't know is that some loan programs allow
borrowers to use gift money to make down payments. This gift
money must generally come from family members, spouses, domestic
partners, or even nonprofits.
NONPROFITS
There are many nonprofit organizations, such as the Home
Solution program, that help first-time borrowers. Sometimes the
seller will pay 3 percent of the sale of the home, plus a fee, to
the nonprofit. The organization then loans the buyer that 3
percent at closing time for use as the down payment. And the
Federal Housing Administration generally insures both Gift and
Non Profit Loans.
There are also programs run by nonprofits to help
low-to-moderate-income people purchase homes. One such program is
the Habitat for Humanity, which requires buyers to contribute by
working on their own home as well as the homes of others.
Additionally, housing finance agencies in many states offer
special loan programs for low- to moderate-income buyers. Fannie
Mae, the biggest buyer of mortgages, offers loans through housing
finance agencies that require down payments of as little as 1
percent or $500, whichever is less.
NO-DOWN and LOW-DOWN
Another option available is the no- and low-down payment
loans. These types of loans, however, have the disadvantage of
requiring costly mortgage insurance. Mortgage insurance benefits
the lender in cases where a borrower defaults on the loan.
But, there are ways around this hurdle. A person can avoid
mortgage insurance by getting a "piggyback loan." A piggyback is
a home equity loan borrowed on top of a primary mortgage. For
example, one could put 5 percent down, get a primary mortgage for
80 percent of the home's price, and a higher-interest home equity
loan for 15 percent of the price.
In one example, a couple made a 5 percent down payment from
the proceeds of a previous home, got a 20-year home equity loan
for 15 percent of the purchase price, and a 30-year mortgage for
80 percent of the price. The piggyback loan allowed them to avoid
buying the mortgage insurance. While the payments on the second
mortgage are roughly the same as what they would have been paying
toward mortgage insurance, they can deduct the interest expense
on their income taxes. And so there's the added benefit that the
piggyback loan is working for them, not the lender.
THE UNORTHODOX
Some African and Caribbean cultures use the unorthodox method
of forced savings known as the susu. In the susu plan, a group of
people use peer pressure to compel each other to save. They pool
their money and then distribute it among themselves,
periodically, such as on a monthly basis.
For example, a dozen people might contribute $500 each into
the pool every month for a year. In the first month, one person
gets $6,000. The next month, the next person gets $6,000, and so
on. At the end of the year, each person has both contributed, and
received, $6,000.
There are many options out there for getting around the down
payment hurdle. Ultimately, the borrower must decide what method
is most suitable to his needs.
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