Finding a good deal on a home may not always mean you bought it at bargain basement prices -- although that’s definitely a good thing. Sometimes, a good deal means you put little money down to buy the home. As markets toughen, sellers are more open to negotiating with buyers to get their homes sold fast. Buying a home using very little money down is possible with a little planning, good credit score and knowing where to get help.
Check your credit score. Order a free credit report every 12 months from each of the three major credit bureaus (see Resources). Resolve any credit issues immediately, continue making payments on-time and make sure your credit stays in tip-top shape.
Start calling lenders. Get interest rates and find out the types of loans that are available to you. Inform lenders that you want to put as little money down as possible, but also let them know how much cash reserves you actually have. Lenders should provide you with a pre-qualification letter that gives you an estimate of the amount you can borrow and the kind of loan for which you qualify.
Research loan options for which you may qualify. One hundred percent financing is available in special situations. USDA Rural Housing program offers a 100 percent loan to qualified buyers purchasing a home in specific areas -- and they may not be as rural as you would think. If you’re a qualifying veteran, a 100 percent loan is also available. If these special circumstances don’t apply to you, FHA loans are available with a down payment as low as 3.5 percent.
Check out down payment assistance options in your state. Programs like Gwinnett County HOMEStretch in Atlanta or the California Homebuyer’s Downpayment Assistance Program (CHDAP) offer low interest, short-term loans to cover down payments and closing costs for first time home buyers. To get more information or see what’s available, contact your state’s housing administration or your local real estate agent.
Use gifted funds from relatives. FHA loans will allow the use of gifted funds for a down payment provided the buyer can furnish a letter stating that the gift is not tied to a loan. The transfer of funds must be documented and becomes part of the loan processing paperwork. If you’ve got a mom and dad who’s just itching to help you purchase your first home, let them help!
Negotiate with sellers. Motivated sellers may be willing to assume closing costs, pay for document fees and possibly even knock a little off the listing price of the home if it means that they will secure a viable contract and head to escrow. State what you want in the purchase contract and let your real estate agent negotiate on your behalf.
Consider using private money investors. If your property is an investment property, other investors are willing to invest with you provided they will be able to receive a high return on their investment. Typically, this return is paid in the form of a higher than normal interest rate on the loan.
Consider creative financing techniques. Sellers may be open to lease-to-own options or even seller financing. Find out what their situation is and you may just be helping them out too.
Fund your down payment using other investments. Sell a portion of your stock portfolio or cashing out of an IRA. Consider borrowing against your life insurance policy or even your 401(k). There may be penalties, additional interest and taxes that must be paid when using these options so it’s important to consult a financial advisor or tax accountant before touching these accounts.
- Keep tabs on your credit score even throughout the escrow process. Buying a car or taking out an extra loan during escrow may lower your score and affect your ability to secure financing on your home.
- Don’t allow lenders to pull your credit report too early in the home buying process. Too many inquiries can lower your score. Instead, provide your lender with the credit report you pulled (hopefully, it’s within the last 30 days).
- Creative financing terms can turn out to be complicated real estate contracts.
- Beware of real estate scams and deals too good to be true. Never pay a fee to get down payment assistance.
Based in Honolulu, Hawaii, Coreen Nishijo has been freelance writing since 2007. She holds a B.S. degree in chemistry from the University of Hawaii at Manoa and is also a licensed Realtor Associate.