Should You Buy A Home With No Money Down?
If you've been trying to save up for a down payment on a home, you understand just how daunting this task can seem. In moments of frustration, you may have wished there was a way to buy a home without having to come up with a big chunk of cash.
The good news is, there actually are ways to purchase a home with no down payment, but just because you can do something doesn't necessarily mean you should. Here's a closer look at your options and the pros and cons of choosing this approach.
How to Buy a Home with No Money Down
If you're looking for a home in a small town, you may qualify for a USDA (U.S. Department of Agriculture) loan. These are only offered for homes in towns with a population of 10,000 or fewer. Some USDA loans offer down payments as low as 0%. They're also only offered to buyers in the low to moderate income range. However, in some areas, this is higher than you may think.
Many credit unions also offer mortgages with low or no down payment. To qualify, you'll typically need a good credit score and an income that's less than 80% of the area's average income. However, each institution has different guidelines, so it's worth it to check out your options.
A VA loan, offered by the U.S. Department of Veterans Affairs, offers buyers the ability to buy a home with no money down and no mortgage insurance. The interest rates are typically attractive, but it's sometimes difficult to qualify. Most VA lenders require a minimum credit score of 620 and a special type of appraisal on the home. This means that even if you qualify, there's a chance the home you're looking at may not. Still, if you're an active-duty military person, veteran, or qualifying family member, it's worthwhile to check it out.
Benefits of Zero Down Payment Home Purchases
Now that you're aware of the options for purchasing a home without a down payment, you'll want to consider whether this is a smart move for you. Clearly, there are some major advantages. The largest is the ability to buy a home sooner. This is particularly attractive if you're currently paying a large sum for rent or you're in a less-than-ideal living situation.
If you don't have to make a large down payment, you'll also have the option to use the money you've already saved for home upgrades, furnishings, and to use as an emergency fund instead. While this certainly sounds attractive, there are also some potential drawbacks to consider.
Downsides of Buying a Home with Zero Down Payment
Borrowing the entire home purchasing amount does come with some downsides. First, it's important to note that because you're taking a larger loan, you'll have to make larger monthly payments for the life of the loan. Having a large mortgage payment will give you fewer options in the future. If you're injured, have to change jobs, or run into other unexpected issues, you may find that it's much harder to adapt.
When you borrow 100% of your home's value, you'll also pay more interest than you would if you made a sizable down payment. While the rate difference might not seem like a big deal now, it can end up costing you tens of thousands of dollars over the lifetime of your loan.
In most cases, you'll also have to pay private mortgage insurance (PMI). Unless you get a VA loan, this is required if you borrow more than 80% of your home's value. This can end up costing you thousands of dollars on top of all the other expenses previously mentioned.
Finally, there's the chance that your home's value will decrease. If circumstances force you to sell your home, you could end up selling at a loss and owing the difference to your lender.
Many home buyers know that the potential drawbacks are more than they're comfortable with and decide to wait until they're able to save up at least a small down payment. However, you'll need to carefully weigh these pros and cons so you can decide which choice is best for you.
Marcy James Imperi
(216) 952-0121
marcy@keyrealtyneo.com