No Money for a Down Payment?

It will be difficult getting a loan if you have absolutely no money for a down payment. Honestly, it’s almost impossible. You will always have some upfront costs. But there are ways to drastically reduce what you have to come out-of-pocket with. The costs are things like a home buyer class,  a membership fee, appraisals, inspection(s) or the earnest money.

The best advice I can give for those that have a limited amount of money for a down payment and/or closing costs are:

• Asking the seller for closing cost assistance (sometimes this works) & down payment gifts.
• First Time Home Buyers programs offered through state governments.
• Use of the Neighborhood Assistance Corporation of America (NACA) program.

We’ll start with the two most obvious options seller assistance and gifts. But, the options will get better as we move on. Seller assistance may not optimal for you, especially in today’s sellers market. And if you have no one to ask for a gift – this is not plausible either. But, to not mention them would be a disservice to information seekers.

These first two options work extremely well when combined with Federal Housing Administration (FHA) loans.

Seller Assistance (for closing cost only)

Since the mortgage crisis of 2008, lenders have prohibited sellers helping with down-payment. They can however, help with closing cost. But, if the market is hot – sellers have no reason to pay closing costs. Asking for help with closing costs could affect the chances of your offer being accepted and/or increase the chances the seller will counter.

There are restrictions on how much the seller can provide to you for closing cost assistance depending on the loan you get.

FHA Loans

FHA allows no more than 6% of the purchase price to come from sellers. Anything above a 6% contribution is an “inducement to purchase” and FHA will lower the amount of the mortgage accordingly. FHA requirements state, “Each dollar exceeding FHA’s six percent (6%) limit must be subtracted from the property’s sales price before applying the LTV ratio”.

The seller contributed 6% are only for actual costs related to closing and items such as; interest rate buy downs, discount points or other concessions. There are fees related to the loan that are not counted as part of the 6%. These include; “fees typically paid by the seller under local or state law, or local custom, such as; real estate commissions, charges for pest inspections, fees paid for trustees to release a deed of trust, etc.”

Conventional Loans

Conventional loans guaranteed through Fannie Mae and Freddie Mac limit seller contributions to 3%. This limit can increase if the buyer puts more money up for a down payment.

Gifts from Family Members

If you could have ask a family member for a gift, you probably would have done that and be reading this. But, just in case you have that option, let’s go over some of the facts:

1. Plan on needing a formal gift letter regardless of if you are using conventional or FHA financing.

• Whoever is gifting you the money will need to show evidence the money was in their account and not obtained through a loan.  This prevents the gift from being a loan in disguise.

2. Gift money is only allowed on primary residences for FHA, and primary or secondary residences for conventional loans. Gift money cannot be used to purchase investment properties.

• Keep a paper trail of the transfer of monies from the gift givers account to your account.

3. FHA and conventional lenders allows gifts from family members, domestic partner or significant others (at the discretion of the lender and underwriting), a charitable organization such as a governmental agency or public entity that has a program providing home ownership assistance to low and moderate income families, or first time home buyers.

• Check out the down payment assistance programs mentioned later in this post.

4. According to FHA and conventional lenders, certain entities are forbidden from giving gifts. Those who cannot give gifts include; the seller, the builder or an associated entity such as the real estate agent or broker.
5. The allowable gift amount can vary depending on the lender. The lender might have a more restrictive product than the guarantor allows. If you are planning on using gifted funds check with your mortgage broker or banker about specific restrictions or limits that may apply. For example, if you are working with a FHA lender that particular lender could enforce the following:

• Credit scores between 500 and 579 require at least a 10% down payment with no gift concessions allowed.
• Credit scores between 580 and 619 require at least a 3.5% down payment with no gift concessions allowed.
• Credit scores above 620 require 3.5% down with 100% gift concession.

Conventional loans generally require a 5% down payment, but there are programs that will allow as little as 3% down. Reduced down payments and the allowable gift amounts are dependent upon the lenders program.

6. Gifts are subject to IRS tax law, if the gift given to you is over $14,000 the giver may be subject gift tax on that money they provide to you. Both of you should seek professional tax advice on this before giving/receiving the gift.

First Time Home Buyer Programs

It’s important to define what a first time home buyer is. It does not mean that you have NEVER owned a home.

“A first-time home buyer is an individual who meets any of the following criteria:

• An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time home buyers).
• A single parent who has only owned with a former spouse while married.
• An individual who is a displaced homemaker and has only owned with a spouse.
• An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
• An individual who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.” Source

There might be a catch or two with these programs, but they will vary from state to state. Here are a couple of the features:

The first few are obvious. 1) The program is usually limited to first time home buyer or buyers within certain income brackets. 2) You must have a qualifying credit score. 3) Most of the time you will have to complete a home ownership class offered through the program. Click here for the listing of state websites that offer housing assistance. Some programs are not limited to first time buyers or limited by income. Look through the programs for the one that will suite your needs best if there are multiple.

First time home buyers programs use either FHA or  conventional financing.  Which means you must qualify for a 30 year fixed mortgage. The program should point you to some preferred lenders that are familiar with the details of the program.

Because the programs are different from state to state, the assistance they offer can vary.  Some offer down payment assistance and/or closing cost assistance, a tax credit or some combination of the three. It is important to read the details of each program to see how they can assist you and if you must bring anything to the table. Also, remember, “first time home buyer” means you have not owned a home within the last three (3) years – not that you have never owned a home at all.

An example of one possible program that offers down payment/closing assistance is actually be giving you an interest and payment free loan on your home. This loan will not show up on your credit, but is secured by putting a lien on your house. The program requires some action from you and once completed, the loan will be completely forgiven.  The lien is satisfied in the public records. An example of a requirement is you must live in the house as your primary residence for a determined amount of time.  Five (5) years is a common requirement.

If you sell the house or it is no longer your primary residence before the meeting the time requirement, the lien becomes due and payable upon the sale of the house.

Let’s look at a quick example:

• You buy a house for $75,000
• You received $7,500 of assistance for down payment and closing cost from the first time buyers program
• Two years later you sell your house for $90,000
• The amount you owe on your house is the first thing paid off therefore, $90,000 – $82,500 (mortgage and amount of assistance from the program) = $7,500 left
• This leaves very little profit for you after realtor commissions and seller closing cost

All things remaining equal, let’s assume you sell the house in 6 years instead of 2 years. Because the 5 year time limit has passed, you no longer owe the $7,500 back to the buyers’ assistance. That means:

• You buy a house for $75,000
• You received $7,500 of assistance for down payment and closing cost from the first time buyers program.
• Six years later you sell your house for $90,000.
• The amount you owe on your house is the first thing paid off therefore, $90,000 – $75,000 (mortgage) = $15,000 left

Even after realtor commission and seller closing cost, this is still $7,500 more profit back to you.

*** Special Note: These calculations do not take into account the addition equity you gained as the years go on or the amount you pay down through mortgage payments.***

Neighborhood Assistance Corporation of America (NACA) 

NACA’s purpose is to build strong, healthy neighborhoods in urban and rural areas nationwide through affordable home ownership. NACA is a BIG commitment, however, this program can get you into a house with reduced out-of-pocket expenses. The program also allows lower than normal credit score and possibly reduced interest rate. This program will also address both down payment and closing costs assistance. The good thing about NACA is its open to everyone, not just  first time buyers or buyers with limited income. The catch is NACA may impose limits on the purchase price of a home. As described by one of NACA’s operations support staff:

“The reason for a NACA maximum purchase price is to keep the focus on NACA’s mission of assisting low and moderate income people in obtaining affordable home ownership and stabilizing low and moderate income communities. To this end, NACA does not have any limits (i.e. either a maximum income or purchase price) for low and moderate income people and areas. The maximum purchase price only pertains to those who fall outside the categories described below.

• Members whose income is below 80% of the median income for the greater Metropolitan Statistical Area (MSA)
• Buying a property in a Census Tract neighborhood for which the median income is below 80% of the greater MSA median income

For those who meet the above criteria, there is no maximum purchase price limit. They can make any purchase within their determined affordability. Members who do not meet the above criteria must purchase within the NACA Maximum purchase prices and are the only group for which the Maximum Purchase Prices apply.”

NACA will limit the housing prices based on federal, state or city historical housing price data. If your income falls into certain guidelines the price of the home you can purchase is limited. Be sure to check the guidelines to see the maximum purchase price NACA will allow in your area if you fall under the qualification guidelines here. The maximum prices do vary.

Do not expect to get in a home in 30 days.  NACA will work with your credit profile and individual needs. There are some people who have to work the program for up to a year and it is TEDIOUS. If you have good credit and everything is order – this process should go faster.

You really have to ask yourself, how bad do you want a house and are you willing to go through the steps this program requires to get it? Check out the details of the NACA program here.

The Purpose of This Article

The purpose of this post is present options to you if you would like buy a home but lack the money for down payment and/or closing cost. Buying a home still requires a level commitment and financial responsibility outside of coming up with the down payment closing costs. Be sure you are for the financial responsibility of home ownership and do not just jump into it because there are resources to provide the initial large lump sum requirements.

***Special Note: Remember the first time buyer programs can vary tremendously from state to state. From the handful I have seen they worked similar to the program as described above, but that description is no guarantee. Some states will also offer programs for home buyers that have previously owned homes. Check out the website for your state to see what’s available. ***