The trouble with buying a house
You want to buy a house. But no matter how you crunch the numbers, you just don’t have the cash on hand. And you might not for a while.
It’s a pretty common story. In fact, more than half of potential buyers saving for a home say they’re “behind where they want to be.”
But what if you could buy a house this year, without saving a penny more?
Better yet, what if you could buy a house with little or no money out of your own pocket?
It sounds crazy — but if you play your cards right, it’s entirely possible. We’ll show you how.Verify your new rate (Dec 15th, 2019)
Table of contents (Skip to section…)
- The trouble with buying a house
- How to buy a house with little or no money out of pocket
- Get creative and save thousands on your home purchase
- Find a no down payment mortgage, or get down payment assistance
- Negotiate your earnest money down
- Ask the seller and lender to help with closing costs
- Your next steps
How to buy a house with little or no money out of pocket
Get creative and save thousands on your home purchase
The great thing about a mortgage? You can buy a house worth a quarter of a million dollars, and pay just a few thousand up front.
But not everyone has a few thousand dollars on hand. And when the initial costs add up, they can start to feel overwhelming.
There are three major expenses you’ll have to cover before moving into your new home.
- Down payment: generally 0-20% of the home price
- Earnest money: generally 2-7% of the home price (ultimately goes toward closing costs)
- Closing costs: generally 2-5% of the home price
To understand how those costs add up, take one example. We’ll call them “Buyer 1”:
|Home price: $250,000|
|Escrow money||Out of pocket||$5,000 (applied to closing costs)|
|Down payment||Out of pocket (FHA loan)||$8,750 (3.5%)|
|Closing costs||Out of pocket||$7,680|
Total up front cost: $16,430
Buyer 1 went the straightforward route. They covered the down payment, earnest money, and closing costs out of pocket, without looking for any alternative routes. All told, they spent more than $16,000 to get into their house.
Now let’s look at another example, who we’ll call “Buyer 2”:
|Home price: $250,000|
|Escrow money||Gift from parents||$500, less $500 gift = $0|
|Down payment||0% down (USDA loan)||$0|
|Closing costs||Seller credit + lender credit||$7,680, covered by credits = $0|
Total up front cost: $0
Buyer 2 got creative. Using a combination of the strategies we’re going to cover below, they were able to negotiate their purchase down to $0 out of pocket.
Of course, getting your costs down to zero will take some extra research and effort on the front end.
But if it saves you something close to $16,000, it’s probably worth a few phone calls. Here’s what to do.Verify your eligibility for a low mortgage rate. Start here (Dec 15th, 2019)
Find a no down payment mortgage, or get down payment assistance
The down payment is probably your main concern; it’s generally the biggest out of pocket expense when buying a home.
According to a recent survey by Freddie Mac, almost one in three people still think the minimum down payment required to buy a house is 20%. On a $250,000 home, 20% down is equal to $50,000 out of pocket.
Thankfully, putting 20% down is almost never necessary. In fact, there are ways to get a mortgage and pay 0% up front, including:
- USDA loans
- VA loans
- Down payment assistance programs
- Using a gift for the down payment
USDA loans, backed by the U.S. Department of Agriculture, don’t require any down payment. They’re also flexible with credit requirements.
To be eligible for a USDA loan, the home has to be in a qualifying, lower-population area. But those aren’t just farms or houses in the middle of nowhere.
In fact, 97% of the U.S. is USDA loan territory, so eligible homes can often be found right on the fringes of major metropolitan areas.Check your eligibility for a USDA loan. Start here (Dec 15th, 2019)
Like USDA loans, VA loans require 0% down and have super lenient credit requirements.
Even better, they don’t require private mortgage insurance. So even if you finance 100% of the home, you won’t have to pay for PMI.
To qualify for a VA loan, you must be an active or former member of the U.S. military, or a military spouse. See specific VA requirements here.Check your eligibility for a VA loan. Start here (Dec 15th, 2019)
Down payment assistance programs
Down payment assistance (DPA) is one of the best-kept secrets of homebuying. These programs are provided at the state or local level and offer assistance for lower-income home buyers — especially first time home buyers.
If you qualify for DPA, you could receive a low-interest loan or a grant (yep, free money) to help cover your down payment. On average, DPA helps borrowers with about $6,000 at the time of closing.
Using a gift for the down payment
Other loan types, like FHA and conventional loans, will require a down payment. But buyer have the option to cover it using a cash gift.
Down payment gifts can come from family members, charitable organizations, or another qualified source.
All that’s required is a gift letter and proof of the gift giver’s adequate funds. Your lender will help you with the paperwork.
Negotiate your earnest money down
With the down payment out of the way, your next big expense is the earnest money.
Earnest money is essentially a large cash deposit to show the seller you’re serious about buying the house. It’s usually paid within a couple days of the seller accepting the offer.
Eventually, the earnest money will be put toward your closing costs — so it’s not just wasted cash. But still, with earnest deposits averaging between 2-7% of the selling price, it can be a lot to put up at once.
- Ask your real estate agent and seller for the lowest earnest money possible to get your offer accepted
Unlike down payments, there’s no such thing as “earnest money assistance.” To lower this cost, you’ll have to rely on the goodwill of others involved in the transaction.
Start by asking your real estate agent what he or she would recommend for the earnest money. Amounts are based on home prices, competition, and local custom, so your agent will have a good idea of a fair price.
Then, work with the seller to lower the earnest money to a point you’re both comfortable with. If the seller is motivated or the house is a fixer-upper, you might get costs down to just a few hundred dollars.
Of course, this won’t work everywhere — especially in hot markets. But if you don’t ask, you’ll never know what you could have saved.
Ask the seller and lender to help with closing costs
Closing costs. They often get overlooked by people planning to buy a house — maybe because they’re actually a collection of smaller fees. But those fees add up.
Closing costs cover the work and processing that happens on your mortgage lender’s end.
At the same time, you’ll also have to pay something called “prepaid items,” which generally include taxes and homeowners insurance paid up about a year in advance. This is to protect the home and the lender.
For example, here’s what closing costs and prepaid items might look like on a $250,000 USDA home loan:
- Loan origination: 1% ($2,500)
- Lender underwriting or processing: $500
- Escrow fees (the company that holds the earnest money): $600
- Title fee: $700
- Appraisal: $500
- Credit report: $30
- Document preparation fees: $100
- Prepaid taxes: $2,000 ($250/mo x 8 months)
- Prepaid homeowners insurance: $750 ($50/mo x 15 months)
- Total closing costs and prepaid items: $7,680
Remember, this scenario is for a USDA loan with a zero percent down payment. And yet, with $0 down on the house, the buyer still needs to cover almost $8,000 in fees before the deal is done.
So, how can you avoid paying 1-5% of the purchase price in closing costs and prepaid items?
- Use down payment assistance to cover closing costs
- Get a seller credit to cover closing costs
- Get a lender credit to cover closing costs
Down payment assistance and closing costs
We mentioned down payment assistance earlier. This money comes in the form of a loan or grant from government or charitable organizations.
What we didn’t mention is that DPA can also be used to pay closing costs — not just the down payment.
The assistance probably won’t cover both expenses fully, but it can make a big dent. Combine DPA with seller or lender credits, and you might get closing costs to $0.
Believe it or not, it’s possible to get the seller to pay your closing costs. You do this by having your agent ask them for a “seller credit.”
Basically, your seller kicks back part of the purchase price (say, $5,000) to help cover closing costs.
If the seller won’t budge at the current asking price, you can try offering a higher purchase price, with the difference coming back to you.
For example, you might offer $255,000 instead of $250,000 — and get a slightly bigger loan to accommodate. The seller then uses the extra $5,000 to cover closing costs for you.
The best way to get seller credits? Look for a fixer-upper home or one that’s been on the market a while and hasn’t received any offers. Sellers are most likely to help out with your closing costs if they’re eager to make a sale.
Lender credits are a little bit different than seller credits. They can help to eliminate closing costs and lender fees — but not for free.
A lender credit raises your interest rate in order to lower upfront costs. So you’re still paying the closing costs in a sense, just spread out over the life of the loan.
For example: Your quoted rate might be 4%. You opt for a 4.25% rate, and in return, the lender gives you a credit for $3,750 (1.5% of the $250,000 loan amount). This reduces closing costs to $1,180.
Lender credits typically won’t cover the whole closing tab, but they can help a lot.
Your next steps
If you made it all the way down here, congratulations! You now have about seven strategies in your back pocket to eliminate out of pocket costs on your new home.
Your next step is to start researching and calling. Check your eligibility for no-down-payment loans and down payment assistance. Ask your realtor to help negotiate the earnest money. And talk to your lender and seller about credits to reduce closing costs.
And don’t forget to compare rates and costs from multiple lenders before choosing a mortgage. It’s surest way to save on short- and long-term costs.Begin your home search with a personalized mortgage rate. Start here (Dec 15th, 2019)