Editor’s Note: This story originally appeared on MortgageResearch.com.
Despite what you may have heard, a 20% down payment is not required to buy a home. Indeed, according to real estate agents, nearly half of home buyers have deposited less than in July 2021. Among first-time buyers? It was 71%.
This is probably a relief if you are considering buying a home yourself. But exactly how did these buyers manage to do it? And what can you do to increase your chances of buying a home with little (or even no) down payment?
Here are a few ways to do this.
1. Buy a USDA eligible home
The US Department of Agriculture Loan Program is a low-use option that allows you to buy a home without any down payment. That’s right: no deposit is required.
The catch is, you have to buy in an eligible rural part of the country. It may sound like a dealbreaker, but you would be surprised at what is considered “rural” in the eyes of the government. Many suburban communities are in fact eligible for the program, which could save home buyers thousands (often tens of thousands) of dollars when purchasing their home.
To see where you would be eligible to use a USDA mortgage in your area, check out the USDA map tool.
2. Get down payment assistance
Down payment assistance programs are offered by state and local housing authorities and may pay part or even all of your down payment in some cases. These programs are usually only for low income buyers, but if you qualify, they can save you tons of money.
Some down payment programs work like loans, which you have to pay off monthly or when you sell or refinance the home. In some cases, these loans are repayable if you live in the house long enough (usually three to five years).
Other aid programs are grant-based, which means they don’t need to be repaid at all. Again, these are usually reserved for borrowers with very low incomes.
A quick note: Many agencies also offer assistance with closing costs, which could offset your home buying costs even more. Be sure to ask your lender or the state housing agency if they are available in your area.
3. Use a government-backed mortgage program
Mortgage programs that are backed by the government can generally go to riskier borrowers (i.e., the government guarantees part of the loan, which means it will (at least partially) repay the lender if you don’t pay back. your mortgage.
USDA loans (mentioned above) are a type of government guaranteed mortgage loan, but other types include FHA loans and VA loan. With Federal Housing Administration loans, a popular product for first-time buyers, your down payment can go as low as 3.5%, or $ 7,000 on a $ 200,000 home. With the loans from the Department of Veterans Affairs, which are only available to veterans and military personnel, you will not make any down payment. However, you will need to meet certain military service requirements to be eligible.
4. Pool money with friends and family
Most loan programs allow you to use something called “gift money” for your down payment (and closing costs). So if you only saved a small amount, you might be able to ask mom, dad or someone else close to help you save and top up that down payment.
Just make sure the move is well documented (i.e. deposit it in your bank account so there is a paper trail) and ask your loved one for a letter. They’ll need to assure the lender that the funds are a gift – not a loan – before they can be used to purchase your home.
5. Focus on smaller homes, like condos or townhouses
The amount of your down payment is directly correlated to the price of your home. On a $ 350,000 home, for example, the minimum down payment on an FHA mortgage would be $ 12,250. If you went for a smaller, cheaper location – let’s say one for $ 150,000 instead, you’d only pay $ 5,250 on that same FHA loan.
While it’s not that easy to find a spacious single-family home for $ 150,000 – at least in today’s market, turning to smaller properties can help and reduce your down payment required. Townhouses, condos, and even manufactured homes can all be great options here. Remember: you can still sell in a few years and then use those profits for the down payment in a bigger, more spacious place.
The bottom line
If you’re strapped for savings, that doesn’t mean buying a home is totally out of reach. As long as you choose the right loan program, focus on the right price range, and take advantage of the various support programs and resources available, homeownership could very well be in your future – and maybe sooner than you think.
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