How you can buy a house with almost no money out of pocket

How I Bought a House With Almost No Money Out Of Pocket, And How You Can Too

When I was 26, I purchased the house pictured above for $250,000 home with $1,100 out-of-pocket.

Yes, I got into a house for less than it costs to rent an apartment.

And I could have done it with none of my own money if I knew what I was doing.

Here’s a how I bought a house with almost no money, and the tactics to help you do the same.

I got a zero-down loan

The most important piece of the puzzle is to get a zero-down loan. Your down payment isn’t the only upfront homebuying cost, but it’s the biggest one.

Even a 5% down payment on a $250,000 home is $12,500. Not exactly pocket change.

You might assume there is no such thing as a zero-down loan. But many programs are alive and well.

When I bought my home in 2003, I got an 80/20 loan, where a second mortgage covered the 20% down payment. 

Those loans no longer exist.

But here are some options that are still available.

100% USDA loan: This is the least-known but perhaps most powerful mortgage in today’s market. If you buy in a USDA-designated area, you may be eligible for zero down. These loans are meant for rural locations, but many eligible areas are solidly suburban. It might even be worth buying farther out than you planned, just to qualify for this no-money-down loan.

Zero-down VA loan: This loan is for those with qualifying military experience. That’s usually defined as having 2 years of service if you are now separated, or 90 days if on active duty. VA loans require no down payment, no monthly mortgage insurance, and come with lower rates than FHA or conventional loans.

FHA loan with down payment assistance or gift funds: FHA loans require 3.5% down, but this program is liberal about where that money can come from. You can get a financial gift from a family member or down payment assistance program. Not everyone has a rich uncle, but nearly everyone has down payment assistance programs in their area. Just Google “down payment assistance [your city] [your state].” You could have access to free money, or at least money you don’t have to pay back until you sell or refinance the home in the future.

Freddie Mac Home Possible & Fannie Mae HomeReady: These are conventional loans that require 3% down. However, like FHA, they allow gift funds to cover the down payment. If you’re buying a regular one-unit home, gift funds can cover the entire down payment and closing cost requirement.

Good Neighbor Next Door $100 down program: While this program is limited, it’s still worth checking into. Select homes are available at a 50% discount to law enforcement officers, teachers, firefighters, and EMTs. Additionally, if you use FHA financing, you may qualify for just $100 down.

Now it’s time to think about closing costs

Unfortunately, solving for the down payment isn’t your only hurdle. There are also closing costs to consider, a significant expense that most first-time buyers overlook.

On a $300,000 home, closing costs could be anywhere from $5,000-$8,000 or more. There are quite a few services to pay for during the process, like title, escrow, appraisal, and lender fees.

You also have to pay many items in advance, like 6-9 months’ taxes and 12 months of homeowners insurance. If taxes are $300 per month and insurance is $75 per month, that’s $3,600 right there.

Luckily, there are strategies to pay for closing costs and prepaid items with other people’s money. (Yes, you can get others to prepay your property taxes for you!)

The following sources of funds can’t be used for your down payment, but they can help pay all or part of your closing costs.

I got a lender credit

I was fortunate to get a closing cost credit from the mortgage broker. 

This means he took some of his own income from the loan and let me use it toward closing.

You probably won’t get a credit from your lender unless you can ask for one, though.

Sometimes, the lender will just have enough profit in the loan to issue you some of the funds. Other times, they may have to raise your rate slightly to generate more money on the backend. Then, they can issue you that extra money at closing.

Raising your rate by just 0.125% or 0.25% could be enough to generate thousands of “extra” dollars in lender profit, which you can use toward closing costs.

When you apply, ask your mortgage lender or broker up front whether a closing cost credit is available to you and how you get it. If they “can’t do that” (they can), simply find another lender.

I got a closing cost credit from my realtor

Your lender is also able to give you a credit toward closing costs.

When I bought my first home, I got about $2,000 from my agent toward closing costs.

The traditional commission for a realtor who helps a buyer is 3% of the home’s price.

That’s high – $9,000 on a $300,000 home. You can negotiate with your agent to issue some of their commission to you. In today’s tougher market, they might just do it.

Just one-third of their commission on a $300,000 home would be $3,000 less you have to pay out-of-pocket.

Request a seller or builder credit

Perhaps the most well-known option for closing cost help is a seller credit, also called a seller concession.

This is a credit I didn’t know to ask for when I purchased my home. If I did, I may have been able to eliminate out-of-pocket costs altogether.

Why would the home seller pay your closing costs? Well, they probably won’t in a hot market or if they have more than one offer.

Sellers issue buyer credits if they are having a hard time selling the home. It’s a nice incentive to draw a buyer’s attention and offload the home sooner.

Right now, in late 2022, it’s a great time to request a seller credit. In many markets, sellers are panicky. Selling a home is harder than it was in 2021.

Fall and winter are great times to request a credit. Sellers fear that they will need to wait until spring if they don’t find a buyer soon. 

If you’re buying new construction, the builder may also be willing to issue a credit.

Your real estate agent is the one who negotiates with the seller for a credit. Ask them about the best strategies in your market. Even $500 will help.

How much can you get in closing cost credits?

Closing cost credits from parties to the transaction are known as “interested party contributions” or IPCs. Interested parties are the realtor, lender, seller, or builder. Basically, anyone who can benefit from the seller is an interested party.

Lenders limit how much you can get in IPCs. Here’s how much you can get for each loan type.

Loan TypeIPC Max (based on home price)
USDA6% from seller; lender can contribute additional funds.
VA4%
FHA6%
Conventional (less than 10% down)3%

These limits are pretty generous. Imagine getting $18,000 (6%) from interested parties on a $300,000 home. In most cases, you won’t get the maximum, but it’s nice to know you can.

One thing to keep in mind is that IPCs are “use it or lose it.” You can only use as much as your actual closing costs and prepaid items. For instance, if you have $5,000 in closing costs and $7,000 in agreed-upon credits, you can’t pocket the extra $2,000 or apply it to your down payment.

In that case, you could use the extra funds to buy down the interest rate, making your monthly payments more affordable.

No money homebuying FAQ

Can I buy a house with no money?

Technically, yes. You could get a zero-down loan, then cover all your closing costs with seller, lender, and agent contributions. However, it’s smart to have money in the bank after closing for emergencies. Your goal should be to save a few thousand dollars, but then not need it for your down payment or closing costs.

Do I need to save up a down payment to buy a house?

No. There are programs in today’s market that don’t require a down payment. Other programs let you use down payment assistance toward your down payment. It’s often not worth spending years saving up for a down payment, while home prices march upward.

Is down payment my only expense when buying a home?

No. You will need to either pay closing costs out-of-pocket or get contributions from the seller, builder, your agent, your lender, or any combination of them. Closing costs can be $5,000 to $8,000 or more on a $300,000 home, so you need to plan ahead to cover these.

You can buy a house with no money out of pocket

If I got into a home with just $1,100 out-of-pocket without information like this, you can do it with zero out-of-pocket using this knowledge.

The market is turning, and lenders, sellers, and agents are now more willing to negotiate to get your business than they have been in years.

The first step is to apply for a zero-down loan. If you’re approved, start negotiating closing cost help. Soon, you’ll have a homebuying story just like mine.

Author

  • Tim Lucas purchased his first home at the age of 26 with just $1,100 out-of-pocket and now owns real estate worth $2.4 million. He spent 11 years in the mortgage industry helping hundreds of mortgage clients from all walks of life -- from first-time buyers using a zero-down USDA loan to an NBA player purchasing a $5 million home. He now leverages that real-world knowledge to bring unfiltered truth about mortgage topics. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more. Connect with Tim on LinkedIn and Twitter.

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