Can’t afford a down payment? 5 Alternative Paths to Homeownership


@samanthavaughan / Twenty20.com

When financing a home, it’s generally a good idea to put down 20% as a down payment. This can result in a lower interest rate, better terms, and avoid paying for private mortgage insurance.

See our list: 100 Most Influential Money Experts
Related: Best Cities to Retire on a Budget of $1,500 a Month

Even so, it is not always possible to put down 20% down payment. But that doesn’t mean you can’t finance a home if you haven’t saved the money. According to Ruth Shin, founder and CEO of PropertyNest, there are several options for buyers, especially first-time buyers with good credit, who have limited funds for a down payment or who prefer to save money.

Below is an overview of five alternative paths to homeownership when you can’t afford a down payment.

Government guaranteed mortgages

There are several federally backed mortgage programs that allow homebuyers to deposit very little or even nothing at all. For example, the FHA loan program, designed to help new homeowners, allows you to deposit as little as 3.5% if your credit score is at least 580. If your score is between 500 and 579, you can deposit as little as 10%.

Loans guaranteed by the Department of Veterans Affairs allow eligible borrowers to deposit nothing, as long as the sale price of the house is not higher than its appraised value.

And if you want to live out of town, a USDA loan may be a good choice. They’re designed to revitalize rural areas and come with 0% down payment, “but you have to live in the area,” Shin said.

Dollar houses

Another federal program that Shin says should be on your radar if you want to buy a home with no down payment is Dollar Homes. “These are homes that haven’t been sold for six months or more in the foreclosure market, as well as homes that have been left abandoned by owners,” she explained. It is in the government’s interest to sell them as quickly as possible, so they are often priced well below market value. This means that you may be able to afford to buy one with cash or with a minimal down payment. However, Shin said it’s important to note that most of these homes will need renovations.

Take our survey: do you have a side concert or other activity?

Vendor financing

In rare cases, sellers may wish to sell their properties as quickly as possible. Shin said these sellers are often more open to flexible payment plans. If you’re a good negotiator, you may be able to finance a home through the seller.

Seller financing, also known as owner financing, means that a loan is issued directly by the seller instead of a financial institution. This allows you to eliminate middlemen and many of the rules or restrictions that come with traditional mortgages, including minimum down payment requirements.

Lease-purchase

A type of hybrid option between rental and financing, rental contracts with an option to buy allow you to rent the accommodation you want for a fixed period. At the end of the agreed period, you have the option of buying the house for yourself, often at a reduced rate. Shin noted that in most cases, a portion of your rent will be set aside for a down payment for the house, though contract terms vary a bit.

Keep in mind that this can be an expensive option. You are generally required to pay an upfront “option fee”, which varies between 1% and 5% of the purchase price. You may also be responsible for all maintenance and repairs to the property while you are renting it out. Also, if you decide not to buy the house after the lease expires, you will likely lose any money paid up to that point.

Bridging loan

A bridge loan (also called a gap loan) is a short-term financing option designed to bridge the gap between buying and selling a home. Because if you buy a home before your existing home is sold, you won’t have this proceeds to apply to the down payment on the new home.

Common among real estate investors and nonprofits, Shin noted that a good balance sheet and high equity in your home make it easier to qualify.

More from GOBankingRates

About the Author

Casey Bond is a seasoned editor and writer who has covered personal finance for over a decade. Currently, she is a reporter for HuffPost covering money, home, and life. Previously, she held editorial leadership positions at Student Loan Hero and GOBankingRates. Casey’s work has also appeared on Yahoo!, Business Insider, MSN, The Motley Fool, US News & World Report, Forbes, TheStreet and more.



Source link

Elaine R. Knight