A brief outline
One of the largest payments that home buyers and real estate investors need to prepare for is the down payment on a home. Some people simply don’t have the funds for this, or their funds are tied up elsewhere. The good news is that there are few options for them, from home equity loans to bridge loans, we’ll take a closer look at each.
One of the biggest expenses for real estate investors and home buyers is a down payment. However, it’s an important cost to cover because the bigger the down payment, the better your chances are of getting a loan and lowering your monthly repayments. The problem is, not everyone can afford to fork out the amount needed for a down payment.
The down payment can therefore be a deterrent for some people who would otherwise like to get into real estate investing. In these cases, you may be wondering if you can get a loan for a down payment. We’ll take a closer look at the options available for people who are looking for alternative ways to fund a down payment.
Do any lenders offer a down payment loan?
The amount of cash needed for the down payment varies, however it is usually a substantial amount. Not everyone has this much money readily available to use, even if the down payment is 5% of the purchase price. The good news for those who cannot fork out a down payment, is that there are options available to finance this.
While there are are no down payment loans specifically, other loans can be used from lenders instead. Some lenders, such as hard money lenders, can provide personal loans or bridge loans for those who need assistance with their down payment. Other programs provide down payment assistance too, such as the National Homebuyers Fund. None of these are down payment loans specifically, but they do assist those who cannot cover their down payment.
Can you use a personal loan for a down payment?
Personal loans can be used for down payments in some cases however this isn’t common and depends on where the borrower is getting a loan from. Conventional loans and FHA (Federal Housing Administration) loans, for example, will not allow homebuyers to use personal loans for a down payment.
When it comes to conventional loans, lenders are looking at the debt-to-income (DTI) ratio of borrowers and taking out a personal loan will lead to a higher DTI. Mortgage lenders are typically looking for a DTI of under 43%, however other lenders may only accept a lower DTI. So, personal loans are often not an option for down payments.
How to get a loan for a down payment
If you’re looking for a way to get money for a down payment, but you don’t have the cash yourself, we’ve got a few good options to try.
1. Use the equity from another property
Those who have invested in a home and built up some equity in this property can use some of this for the down payment on another property. By using a home equity loan, or a Home Equity Line of Credit (HELOC), you can tap into your existing home equity and use it to fund your next home purchase.
With a home equity loan, you can get a lump sum payout to use for the down payment, which is the difference between the amount you owe and the new mortgage you’d like to take. You’ll pay this loan off over time, usually with a fixed interest rate. Which means that the repayments are predictable and easier to budget for.
A HELOC is a revolving line of credit that is supplied from the home equity you’ve already built up. A HELOC lets you take out as much as you need, when you need it. For down payments on another property, this can be an ideal way to use the cash that you have tied up in real estate.
Pros:
- A cost-effective way to borrow thanks to lower interest rates
- Borrowers can get access to funds timeously
- You can often borrow up to 85% of the home’s value
- You may be able to avoid having to pay private mortgage insurance
Cons:
- Liquidating the assets takes time, so in the case of an emergency, this may be a problem
- If you default on the loan, your home can be foreclosed
- You may have more than one mortgage payment
2. Get a personal loan
Some lenders, such as New Silver, provide personal loans which can be used for down payments. However, many mortgage lenders will not accept this, so this is a consideration for borrowers who go down this route. Personal loans are based on whether the borrower can repay the loan or not, so the lender typically won’t be concerned with what it’s being used for.
Personal loans are usually accepted for down payments for most lenders if the borrower is changing jobs and needs to move, or when the money will be available soon but isn’t yet. However, personal loans are not highly regarded by most lenders as this is extra debt, on top of the debt a borrower is already applying for.
Pros:
- Lenders won’t need to know what the loan is being used for
- Funds can be issued quickly
- A good solution for those in an emergency
Cons:
- Personal loans generally come with higher interest rates
- Some mortgage lenders won’t accept personal loans being used for down payments
- Can raise your DTI
3. Use retirement funds
Tapping into your retirement savings or 401(k) may be an option for some people who want to invest in a home for the long-term but don’t have the cash for a down payment. Using your retirement savings should only be done if you plan on using the property as a part of your retirement plan, or a way to generate an income for the future.
Pros:
- You are borrowing your own money
- It’s easier to qualify for this method
- The repayments will come after tax
Cons:
- You could be impacting your retirement
- The entire amount will need to be paid back if you lose your job
- A default could lead to extra penalties
4. Ask friends and family
One of the easiest and quickest ways to get the funds for a down payment is to borrow from a friend or family member. If there is someone close to you who can help out, this could be the easiest solution as there are no qualification criteria, and you’ll most likely get flexible terms for paying them back. Bear in mind however, the lender will take note of this when deciding whether or not to approve your home loan.
Pros:
- Flexible repayment terms
- A trusted source to borrow money from
- No application necessary
Cons:
- Any defaults on repayments can impact your relationship with the friend or family member
5. Down payment assistance programs
Down payment assistance programs are provided by the likes of the National Homebuyers Fund. These programs are offered to low-income and moderate-income home buyers who qualify and can provide them with up to 5% of the home’s purchase price for a down payment. You can contact your local housing agency to see if you qualify for a down payment assistance program or find a program via the U.S. Department of Housing and Urban Development (HUD).
Pros:
- A single monthly payment instead of multiple payments
- You could qualify for a grant that you don’t need to repay
Cons:
- The rules may entail living in the house for a certain period or risk having to repay the funds
- You may still be liable for mortgage insurance
6. Bridge loans
Short-term bridge loans are another option for borrowers to use for a down payment on a new property, by using the equity on the property they’re selling. This is useful if borrowers need a down payment quickly, and the sale cannot be contingent on the sale of their home.
First-mortgage bridge loans: This loan is for up to 80% of the current value of your home and once the current home loan is paid off, the extra money can be used for the down payment on the new home.
Second-mortgage bridge loans: This loan allows you to borrow up to 80% of your home’s current value above what is left on your mortgage. This option is preferable for those who have a good rate on their mortgage already.
Pros:
- You can use equity that you have already built up in a home before it is sold
- You will be able to buy another property before your current home sells
Cons:
- This option can lead to multiple monthly mortgage payments
- Higher interest rates and closing costs are associated with bridge loans
- Both homes could be foreclosed if you were to default on the bridge loan payments
Final Thoughts: Is it possible to buy a house with no money down?
Buying a house without putting any money down upfront is possible. For those who don’t have the funds but want to get into the world of real estate, this is an option. A zero-down payment mortgage exists, which allows borrows to get a loan to purchase a house, without needing a down payment. This is done via government-backed loans, so the government will therefore be liable for the bill, should you default on your loan repayments.
These loans allow lenders to feel more comfortable providing loans to those who cannot otherwise afford them, and don’t have a down payment. There are 2 types of zero-down payment loans: VA loans and USDA loans. VA loans are offered to active service duty members, veterans and certain spouses and USDA loans are provided by the United States Department of Agriculture, to encourage development in rural and suburban areas.
So, for those who do not have the cash available for a down payment, we’ve outlined several options that enable you to buy a home, and for those who have no money at all to put down there are also options available. Real estate is one of the most successful investment opportunities, so it’s worth looking at all the possibilities available for entering the real estate world.