You may have a hard time finding some pennies to put in your piggy bank once you've paid all your monthly bills. For most young couples buying a home with cash is a pipe dream, but thankfully you can borrow the bulk of the money you need when you buy your nest. Even with a mortgage though, you normally need to have some cash in your savings if you want to buy a home. However, if your piggy bank is silent when you shake it, your dreams of home ownership might not be totally hopeless.
The Four C's of Credit
Veteran lenders often refer to character, collateral, capacity and capital as the "four C's of credit." Lenders evaluate your character by checking your credit report to see if you have a good history of repaying your debts. Your collateral is the home you want to finance and your capacity to repay the loan is based upon your income level minus your existing debts. You normally can't get a loan unless you prove you also have capital or cash to cover the closing costs and the down payment. Lenders also like to know that you have a little cash stashed away for a rainy day in case your income source suddenly dries up. If you don't have any money saved, then your chances of getting a loan are greatly reduced.
Most lenders sell home loans to the government-backed mortgage companies Freddie Mac and Fannie Mae. Neither Fannie nor Freddie will buy your loan unless your lender verifies your assets. You can use funds from a credit card to cover some of your costs but the money in question cannot amount to more than 2 percent of the loan amount. Both Fannie and Freddie require you to make a 5 percent down payment so even with a credit card you still need another source of funds. Aside from the down payment, you also need cash to cover the closing costs. If you don't have cash in your savings you can liquidate other assets such as savings bonds. You might also be able to withdraw money from your retirement accounts, although doing so will lead to hefty tax penalties. Many employers, however, allow participants to borrow against their 401(k) with no penalty.
The Federal Housing Administration insures mortgages on which you have to make only a 3 1/2 percent down payment. You do have to prove that you have the cash to cover the cost but you don't have to use your own funds. Under FHA rules, a relative can provide you the money as a gift although the cash has to be in your account before the loan closes. The donor must sign a letter explaining that the funds are a gift rather than a loan. Better still, the FHA allows the seller to pay your closing costs so with an FHA loan you can get a mortgage even if you haven't got a penny to your name.
100 Percent Financing
Prior to the housing market crash of 2007, many lenders offered no income/no asset 100 percent financing loans. Since the market tanked, most lenders require you to make a down payment of up to 20 percent but some lenders still offer these no down payment loans. Normally, these are portfolio loans, which means the bank holds your loan rather than selling it to Fannie or Freddie. The United States Department of Agriculture also insures 100 percent mortgages in some rural areas if you buy an existing home. Unsurprisingly, underwriting standards are strict, so you need to have a good credit score to get one of these mortgages. These loans often have higher interest rates than conventional loans, which means you pay more in the long term.