Can I buy a house with no money?
You’ve found the perfect home, and you have enough income to afford monthly mortgage payments.
But do you have enough cash on hand to pay the upfront costs of buying a home?
Even with a no-money-down mortgage like a VA loan or USDA loan, you may still need cash for closing costs.
Plus, some types of loans require you to have additional cash reserves you come up with upfront costs.
Fortunately, there are ways to buy a house even if you’re short on cash. Here’s how.
Check your home loan options (Dec 29th, 2020)In this article (Skip to…)
- Upfront cash needed to buy a house
- Ways to reduce your upfront cash requirement
- Typical out-of-pocket costs when buying a home
- Additional costs to prepare for
- Check your home buying eligibility
Upfront cash needed to buy a house
A down payment isn’t the only upfront cost when buying a house.
Home buyers should also budget 2-5% of the purchase price for upfront fees including things like earnest money, closing costs, and prepaid property taxes and homeowners insurance.
The total “cash to close” is equal to the down payment plus around 2% to 5% of the purchase price.
For example, here’s how much money you might need to buy a $300,000 house:
- Purchase price: $300,000
- Down payment: $15,000 (5%)
- Closing costs: $9,000 (3%)
- Total money needed: $24,000
Buyers can expect closing costs to be a higher percentage of the loan amount for lower-priced homes, and a lower percentage for higher-priced homes.
For instance, a home costing $150,000 might require $6,000 in closing costs (4% of the home’s value) while a $450,000 home might require $9,000 (2% of the home’s value).
Cash to close is different for each buyer
The upfront costs of buying a home will vary depending on things like the price of the home, the type of mortgage, and property tax rates in your area.
For instance, the lender will
typically collect four to six months of property taxes upfront. Taxes vary widely based on the
home’s market value, and there is a big cost difference between a house with $100 in
monthly taxes and a house with a $500 monthly tax bill.
The best way to find out your total closing costs is to get a personalized estimate from a mortgage lender.
A lender can provide a written estimate of your “cash to close,” which is the total amount of money you’d need upfront to close your mortgage.
The lender will also verify that you have, or will have, enough in your bank accounts to close the loan by looking at two months’ worth of your bank statements.
Verify your home buying eligibility (Dec 29th, 2020)Ways to reduce your upfront cash requirement
Saving enough cash for the down payment closing costs is the biggest barrier to homeownership for most buyers.
Fortunately, there are ways to reduce or even eliminate your
out-of-pocket costs when buying a house. These include:
- Opt for a low- or no-down-payment mortgage loan — VA loans and USDA loans allow zero down payment; conventional loans allow 3% down; and FHA loans start at 3.5% down payment
- Look into down payment and closing cost assistance — There are down payment assistance (DPA) programs in every state intended to help lower-income and/or first-time home buyers afford their upfront costs. Research DPA programs in your area to see if you qualify for aid
- Use gift money from a relative or friend to cover your upfront costs — Most loan programs allow you to cover part or all of your out-of-pocket costs using money gifted from a family member or friend. You’ll just need to make sure the gift funds are properly documented
- Negotiate with the seller to pay some or all of your closing costs — It’s possible for the seller to pay the buyer’s closing costs. This arrangement is known as ‘seller concessions.’ The amount a seller is allowed to cover varies by loan type. Sellers are more likely to help out in a buyer’s market where they’re having trouble selling the home
- Ask for a lender credit — A ‘lender credit’ means the mortgage lender will pay part or all of your closing costs. In exchange, you’ll pay a higher mortgage rate for the life of your loan
Using a combination of these strategies, it may be possible to buy a home with very little out of your own pocket.
Typical out-of-pocket costs when buying a home
Even if you’re using a low- or no-money-down mortgage, it’s likely you’ll have to cover some costs out of pocket.
Here are the different fees you can expect when buying a home, along with typical price ranges for each one.
Down payment (0-5% of the purchase price)
The down payment you need will vary based on your credit score and the type of loan for which you qualify.
For a conventional loan guaranteed by Fannie Mae or Freddie Mac, you’ll usually need a down payment of at least 5%, although down payments of 3% are available with programs like the HomeReady and Conventional 97 loans.
To qualify for a conventional loan with 3% down, buyers typically need a credit score of at least 620.
However, a conventional loan is not your only option.
An FHA loan requires a down payment of just 3.5% of the home’s purchase price if your FICO score is at least 580. Though some lenders may require a higher credit score of 620 to 640.
Other loan types eliminate the down payment requirement altogether.
Home buyers with military experience should check their eligibility for a zero-down VA loan. Along with 100% financing, VA loans offer extremely low interest rates and don’t charge annual mortgage insurance.
The USDA loan, likewise, requires nothing down and is available to home buyers in rural and suburban areas.
Check your home loan options (Dec 29th, 2020)Closing costs (2-5% of the loan amount)
A mortgage loan costs money to set up. These ‘closing costs’ are passed on to the home buyer. Following are some of the lender fees you might see on your cost estimate.
- Origination fee
- Application fee
- Processing fee
- Underwriting fee
But the mortgage lender is not the only entity that will collect fees. There are also third parties who charge for services required for loan approval. These include things like:
- Title fees
- Title insurance
- Escrow fees
- Appraisal
- Credit report
- County recording fee
Closing costs will vary depending on the size of your loan, whether a lawyer is present at the closing table, and the fees that your municipality or state charges.
In total, you can expect to pay about 2% to 5% of your home’s purchase price in upfront closing costs.
This is a wide range, so check with your lender about the exact amount needed in your situation. Ask for a lender credit or alternative loan options to reduce your total out-of-pocket expense.
You can also ask your Realtor or loan officer about non-profit down payment and closing cost assistance programs in your market.
Earnest money (varies)
You’ll also need enough cash in the bank to make your earnest money deposit. This is the money you pay right away after the seller accepts your offer to buy and you sign the contract.
Earnest money shows you’re serious about purchasing the home. This money is applied to your down payment and closing costs if the home sale closes, so the cost is included in the 2-5% estimate for closing costs.
If the sale falls through, you can get your earnest money back.
Earnest money does not go directly to the seller. Instead, it is held at the escrow company, and the seller receives confirmation of receipt.
The amount of earnest money you need will vary based on the home price range and the competition in your housing market.
Sometimes, you’ll need to deposit just a couple hundred dollars. Other times, you might need an earnest money deposit as large as 1.5% of the home’s sale price or more. If you are buying a $200,000 home, a 1.5% earnest money deposit would come out to $3,000.
Ask your real estate agent or Realtor how much earnest money you’d need to show you’re serious about buying the home. Your agent will help negotiate the exact amount of money you need to deposit.
Cash reserves (0-6 months’ worth of mortgage payments)
To qualify for a mortgage loan, you’ll usually need a certain amount of money set aside in your bank accounts.
Known as “cash reserves,” these are dollars you won’t be using to cover your down payment or other closing costs. The lender wants to see this money so it can be sure you’ll be able to afford your new monthly mortgage payments.
Different lenders have different requirements about how many months’ payments you’ll need in your account.
Most lenders require at least two months of cash reserves if you are applying for a conforming mortgage loan underwritten to Freddie Mac or Fannie Mae guidelines.
For example, let’s assume the total cost of your future housing payment is $2,000. This includes the loan’s principal and interest payment, along with property taxes, homeowners insurance, private mortgage insurance premiums (PMI), and homeowners association (HOA) dues.
In this case, you would need at least $4,000 saved to meet a lender’s requirement of two months’ worth of reserves.
But this isn’t a rigid rule. If your credit score is high — say 740 or higher on the FICO scale — and you are putting down a larger down payment, your lender might require no reserve funds at all.
These borrowers have already shown an ability to pay their bills on time, so lenders don’t need to see as large an amount of reserve funds.
In addition, VA and FHA loans tend to be exempt from reserve fund guidelines.
Since the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA) guarantee these loans, lenders can relax some on their underwriting rules.
You should expect to show more reserves if you are buying an investment property such as a rental home.
Your lender may require as much as six months’ worth of cash reserves for this type of mortgage. Larger cash reserves help landlords weather a period of property vacancy or other unexpected financial stress.
Verify your home buying eligibility (Dec 29th, 2020)Additional costs to prepare for
We’ve covered costs to open and close your loan, cash for an earnest money deposit, and keeping your bank account healthy enough to show you can make your ongoing monthly mortgage payments.
But there are a few other expenses you should plan for, too:
- A home inspection — Before finalizing your home purchase, you’ll want an independent home inspection which can reveal major and minor defects before you buy. Expect to find some minor and cosmetic problems; if the inspector finds structural or safety issues, you’ll want to consider buying a different house or negotiating with the seller to resolve the issues before you buy. A home inspection typically costs between $250 and $400 for an average-sized home
- Moving expenses — If you have friends and family members who happen to have trucks and strong backs, you may not need to worry much about moving expenses. But if you’re moving to a different area or across the country, moving can easily cost $3,000 to $5,000. If you’re moving for work, ask whether your new employer will help cover moving costs
- An emergency fund — A job loss or an unexpected major repair at your new home could compromise your ability to pay your mortgage. Most financial advisors recommend keeping a few months’ living expenses set aside for emergencies. That way you won’t run up credit card debt just to pay your bills
New homeowners often underestimate the amount of cash they’ll need both upfront after the home sale closes.
Budgeting for related costs — like moving and new home repairs — will help you put together a more realistic estimate of how much money you really need to buy a house.
Check your home buying eligibility
Mortgage rates are low, making it easier for both repeat and first-time homebuyers to qualify for a mortgage.
Low interest rates also keep upfront costs low: you can accept a slightly higher-than-market rate in exchange for a lender credit.
Check today’s rates to find out what you qualify for. Depending on the loan program, you may be able to buy a house with less money out of pocket than you think.
Verify your new rate (Dec 29th, 2020)
