Ways to buy a home without cash

Robert McGarvey
October 25, 2013

Rachel Wolfinbarger knows it's just a myth that you need a 20% down payment to buy a home today. How does she know? Because the California blogger bought a $255,000 Rancho Cucamonga home last year, and she put down just 3.5% to get a mortgage backed by the Federal Housing Administration.

Even sweeter, her house has substantially appreciated in the hot Southern California housing market. Said Wolfinbarger: "I couldn't think of a better scenario--having over 20% worth of equity within about a year when we only put down about 3%."

She's not alone. Buyers in the tens of thousands are discovering that in 2013, there are plenty of ways to buy a home with little savings.

Other buyers have cash in their pockets but are skimping on down payments anyway, because they'd rather borrow plenty at today's historically low rates.

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Across the country in East Harlem, banker Michael Germano just paid in the low seven figures for a four-family town home -- and he did it with around 10% down, not the traditional 20%. "Mortgage rates are so low, why not take advantage of it?" he said. "I can generate more of a return for my money in other investments."

"There are many options for buyers who want to put little or nothing down," said Michael Moskowitz, president of Equity Now, a New York City-based direct mortgage lender. His firm advice for house hunters who want to go this route: "Only work with mortgage brokers who can show you multiple options. Some sell only one product, and that won't be best for all buyers."

Moskowitz, for instance, is not a fan of FHA low-down loans ("too expensive"). But he very much likes Veterans Administration no-down-payment loans, which get even better for disabled vets.

VA loans, unlike many low-down-payment mortgages, can be obtained without private mortgage insurance. PMI costs as much as 1% to 2% of the mortgage per year (or $3,000 to $6,000 on a $300,000 loan).

An equally sweet deal for some buyers: mortgages backed by the U.S. Department of Agriculture. These loans can cover 100% of the cost of a home in a "rural area." Much of the country falls within that definition. USDA loans do require mortgage insurance, but the rates are dramatically lower than those imposed by FHA, experts said.

Don't think that the only place to find low-down loans is through the federal government. At Tropical Financial, a credit union in Miramar, Fla., mortgage sales manager Doug Leever said, "We have a first-time buyer program that we'll lend 97% of the home's value, and the 3% down can be gift money."

The program usually costs buyers less than a comparable FHA loan would, he said.

Even more aggressive lending is offered by the nation's biggest credit union, Navy Federal in Vienna, Va.: a homebuyer's choice program that provides 100% financing. Dana DeSarno, lending spokesperson for Navy Federal, said that "it's a great program for members who aren't eligible for a VA loan or who have already used theirs." Most borrowers are first-time homebuyers, she said, and "we do not charge PMI."

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Many other credit unions, and some banks, offer similar programs to help customers who have good credit scores but little or no savings nonetheless take advantage of today's comparatively low housing prices.

Some states also offer assistance. In Colorado, for instance, there's CHFA. In New York, it's SONYMA. In California, there's CalHFA. Programs come with many restrictions - some are only for first-time buyers, others support loans only in certain areas, many have income caps - but all are there to help homebuyers who lack the 20% needed to buy under many conventional mortgage programs.

"Now is the time to take advantage of leverage," said New York associate broker Ray Schmitz with Rutenberg Realty. He's seeing an increasing number of deals involving small down payments, and economics is on the side of those buyers, he said. "This is a great time to borrow."

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