Can I Buy a House Without a Down Payment?

David Goldhirsh
Written by David Goldhirsh
Updated June 15, 2021
Aside from multiple government programs, there are seller and lender credits that can cover down payments and closing costs. (Photo by Eldon Lindsay)

“How do I buy a house without any money?”

Believe it or not, I get this question quite often. A lot of people think, in the current lending environment, the answer to that question is, “You can’t.”That simply isn’t the case. A lot of my clients come to me with perfect credit and good job history but little or no funds and we are sometimes still able to get them into a home. Aside from multiple government programs, there are seller and lender credits that can cover down payments and closing costs. In addition, depending on the program, the funds can be a gift from an immediate family member for some or all of the costs.Let’s focus on the seller and lender closing cost credits and the gift funds. These are a lot more common to residential mortgage purchase transactions in the local Chicago market. First, we'll define what each one is:

Seller Credits

A seller credit occurs when the seller grants a portion of the proceeds of the sale to the buyer. Because our buyer was pre-approved by a seasoned mortgage professional, we already know how much in funds they are short for closing.

Our realtor will know to present the offer, along with the specific closing credit request, to make up the shortage. Sellers are usually agreeable to this but be aware that they may not be as agreeable when it comes to negotiating the purchase price if they grant the credit.

Things to Keep in Mind

• Fannie Mae allows a credit of up to 3 percent of the purchase price.

• FHA allows a credit of up to 6 percent.

• Fannie Mae requires buyers to have 5 percent of their own funds into the transaction.

• FHA requires buyer to have 3.5 percent of their own funds into the transaction (see gift funds for exception).

Lender Credits

A lender credit works essentially the same way, except for where the source of funds comes from. A seller credit comes from the seller’s proceeds, while the lender credit comes from a portion of the expected profit the investor will make on the loan.

How does that work? For example, the lender might give you a market rate quote of 4.25 percent on a 30 year fixed rate mortgage with no closing credits. You let the lender know that you may not have enough funds to close and request a credit. The lender might charge a rate of 4.375 percent instead of the 4.25 percent market rate.

Because they are charging an above market rate and will make additional profit over the life of the loan, they will credit that back to you at the closing to cover some of the costs. You are essentially financing a portion of the closing costs. The lender gives you cash at closing in exchange for you having a slightly higher payment for as long as you stay in the loan.

RELATED: Should I Be Preapproved Before Home Shopping?

Gift Funds

A gift can also be used towards your down payment and closing costs. There are a few exceptions, but normally the gift needs to be from an immediate family member. To use the gift we need to document the transfer of fund and provide a gift letter signed by all parties that states the amount and that it doesn’t need to be paid back.

Fannie Mae and FHA treat application of gift funds differently so let’s look at what the difference is:

FHA: Allows gift funds to be used for 100 percent of the down payment and closing costs. That means a family member can cover the entire out of pocket expense if they are willing. While this is rare, we can combine gift funds and seller credits so the buyer can close without using any of their own funds. The gift funds would just have to, at a minimum, cover the 3.5 percent down payment. After that, the seller can cover the rest.

Fannie Mae: Now allows an unlimited amount of gift funds with underwriting approval

If you have questions on the process or would like to walk through the full mortgage pre-approval process, be sure to contact an experienced and reputable mortgage lender in your area.

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