A No Down Payment Loan in California: Do I Qualify?
Given the rising prices of homes in California and similar markets, the issue of being able to come up with a 20 percent down payment is extremely daunting or downright impossible for many would-be buyers. This is where a no down-payment mortgage begins to play a critical role for affected home buyers.
What is a No Down Payment Loan?
Essentially, a no-down-payment loan works one of either two ways: first, the mortgage is entirely provided without a down payment requirement, or second, the borrower takes out two loans, one for the primary purchase and one to cover the down payment for the primary purchase loan.
How to Buy a House in California with No Money Down
There are both government and private sector programs available all across California for those who need help with their down payment requirement. Common examples of government assistance include:
- U.S. Department of Veterans Affairs (VA) loans
- U.S. Department of Agriculture (USDA) loans specific to home buying in rural areas
- U.S. Federal Housing Authority (FHA) loans
- 97% LTV loans
One of the big benefits of being a veteran of the armed services for this country is the home buying assistance from the U.S. Department of Veteran Affairs, better known as the VA Loan. The program is intended to help military veterans who may not have had the opportunity to seek large incomes to more easily get into a home with fewer hassles.
Who is Eligible for a VA Loan?
The first qualification is that the borrower needs to be a qualified veteran of any of the armed services. This includes everything from the Marines to the Air Force to the Coast Guard. The borrower also needs to have good credit history and financial accountability.
What Are the Requirements?
Aside from being a veteran with a good financial history, the borrower will need to obtain a Certificate of Eligibility directly from the VA agency to begin the VA Loan borrowing process.
What Are the Fees?
While the VA Loan program offers a lot of benefits, it’s not provided for free. The borrower does bear some cost in being an applicant and approved. This cost is borne via the VA Funding Fee charged to every approved VA Loan. Those who are certified service-connected disabled do not pay the fee. The charge will range from a high of 3.3 percent to a low of 1.25 percent.* If some kind of a down payment is provided, the fee lowers. Borrowers do not have to pay the fee up front; it can be amortized over the life of the loan.
Pros and Cons of VA loan
On the benefit side, the big bonus is the elimination of the down payment (as long as the sales price doesn’t exceed the appraisal). Additionally, VA Loan recipients enjoy very competitive borrowing rates, usually a slight bit lower than the regular market for a good credit borrower. Further, borrowers with a VA Loan don’t have to deal with mortgage insurance premiums and their closing costs are capped far smaller than a regular civilian’s cost in a purchase.
The downside of the VA Loan process is, of course, the bureaucracy of dealing with a large federal program. Response times can be slower than desired.
Another long-term downside is the lack of equity in the home. Equity is built up with payments on the mortgage financing the purchase. With no down payment, that equity building takes longer and is not as available as quickly as it is for a regular buyer.
The U.S. Department of Agriculture provides a rural homeownership loan for homebuyers who specifically choose to purchase in designated rural areas.
Who is Eligible for a USDA Loan?
Lower income borrowers are a key group the USDA program is aimed at. Retirees could be eligible, depending on their income status, but working people need to be within the income metrics of the program or they will not be considered.
What are the Requirements?
The home being bought must also be located in a USDA designated rural area, and USDA loan officers can confirm eligibility of a particular location. Large homes are not allowed. The living property should be 1,800 sq feet or smaller with a market value less than the local average. Further, the income of the borrower cannot exceed the low income limit for the area, per the USDA metrics (this is usually below 115 percent of the median income for the target area).
What are the Fees?
The USDA program has two fees, a USDA mortgage insurance premium of 1 percent of the loan borrowed and 0.35 percent annual fee. Basically, one can expect to pay $1,000 for every $100,000 borrowed up front, and then a $350 fee annually.* Both can be built into the mortgage amortization versus being charged immediately. These fees were dropped from higher levels in 2016.
Pros and Cons of USDA Loans
The benefits of the program are no down payment being required in the purchase and 100 percent financing of the property, guaranteed by the federal government, a key assurance for sellers.
Disadvantages include limitations on property size & value, and borrower income.
I’m Not Eligible, What are my Other Options?
Just because one is not a veteran or interested in living in a smaller rural home doesn’t mean that he or she is out of luck. There are other programs available to help with buying a home. The Federal Housing Authority program is a big boost for those not eligible or interested in the above programs.
FHA Loan (Low Down Payment Home Loan)
The FHA program is not a no down-payment option. Unlike the other programs above, there is a down payment element involved, but it is much lower than typical market requirements. The other big element is that FHA loans don’t have as many fees or their fees are much smaller than the average market sale process, again big savings.
Who is Eligible for FHA Loan?
The most common and successful applicants for the FHA program tend to be first-time home buyers who are trying to get into the home ownership market and need a leg up on the daunting down-payment requirement. They may have savings, but it’s not enough to meet a typical “skin in the game” requirement from private lenders. Additionally, those who do not have a great credit score or fall into the lower income bracket realize a big help from the program as well. Both would be entirely shut out of the housing market on the private side.
What are the Requirements?
The program requires a 3.5 percent down payment for applicants scoring over 580 in a credit score, or 10 percent from those above 500 but below 580. The appraisal of the property will be performed by an FHA appraiser, not a private choice. Mortgage insurance has to be paid. The borrower needs a steady income source and proof of employment for at least two years by the same employer, be over 18 years of age, and will use the home as a primary residence. Borrowers also need to be able to handle a 0.85 fee of the loan value, charged monthly, which pays for the costs of the FHA Loan program.*
What are the Fees?
There is a 0.85 percent loan value fee for mortgage insurance, charged with the mortgage payment. There is also a private mortgage insurance fee charge, also combined in the loan, for 1.75 percent.*
Pros and Cons of FHA Loan
The benefit of the FHA loan is the much smaller down payment requirement and lower costs associated with mortgage insurance. While still required, both are far smaller and less out of pocket for the borrower than the average market alternatives.
The downside of the FHA loan is that the properties eligible to be considered have to be below the FHA value levels. The FHA loan program is not available for every home on the market, and that can rule out significant regions of California where the average home price is higher.
May Have Zero Down Payment with a California Grant Program
Various California grant programs exist to help minimize or entirely cover down payment costs for buyers, particularly first time homebuyers. Here is a list just for California grants:
Other states are available as well (source: FHA.com)
Conventional 97% LTV Mortgage
The private market option for a no or low down-payment purchase is essentially the Loan-to-Value (LTV) Mortgage option. This is a private lender vehicle that is not available from every lender financing home sales. It’s worth looking at, however, because the actual down payment requirement is a low 3 percent of total purchase value.
Who is Eligible for a Conventional 97% LTV Mortgage?
Eligible borrowers typically include those with debt lower than 41 percent of income, a fairly good credit score above 620, no previous home ownership in the last 36 months, primary residence intent for the property being bought, and the overall financing is 97 percent maximum.
What are the Requirements?
Fundamentally, the borrower has to come up with 3 percent of the sale for a down payment.* There is no LTV no-down payment loan in this program, even among private lenders. What they may offer instead is a second loan to cover the 3 percent and fill the gap. The borrower then ends up with two loan payments as a result. The buyer must also be a first-time home buyer, and the property must be a single family home only.
What are the Fees?
There is a private mortgage insurance component. It will range from 0.75 to 1.25 percent of the purchase value and can be paid monthly within the loan.* There are also closing costs typical of the market.
Pros and Cons of Conventional 97% LTV Mortgage
An advantage of the private market LTV loan is that there is no upfront charge for private mortgage insurance, and when equity reaches 22 percent the insurance cancels. The down payment requirement is only 3 percent, even lower than the FHA comparative requirement. And the big plus is the higher loan amounts possible where government programs are capped.
The downside of the LTV loan is a more conservative loan to income requirement for borrowers. In some cases, sellers try to help, but with an LTV loan, they are limited to 3 percent. Student loans in deferment can be counted as debt where in government programs they are ignored. And finally, the credit score minimum is higher than government programs.
How to Cover Closing Costs
Even with a loan approval, a California homebuyer will still get hit with closing costs that range anywhere from $2,000 to $10,000 in a purchase. Much depends on the given sale and requirements agreed to. There are three big ways for a borrower to cover closing costs outside of earning more income and saving more prior to the purchase. These are gifts, lender credits or seller credits.
Aside from the limitation of taxes on gifts that hit the giver, gift funds are also limited to an extent to make sure the true buyer of a home is involved in the purchase. Because a lender has government requirements to identify all money sources in a sale, the gift giver will likely have to provide certification of the funds, their source, their purpose and legal certification of the gift. Without this, the funds can’t be used. Taking a gift is not as simple as applying $10,000 to a down payment from a gift from Uncle Fred out of the blue. Further, some programs require that a down payment be a mix of gift and personal funds, not all gift funds.
A lender credit is where the lender kicks in some kind of incentive to capture the financing business of a borrower. This can come in the form of a lower interest rate using preferred services, or it can be in the form of discounted processing and closing fees.
The seller credit is a discount to a sales price provided by the seller, or the seller kicking in a payment for some of the costs of a buyer. This is typically done to help a sale close and is a technical approach to a price adjustment by the seller.
Down Payment Assistance Programs and Grants
There are various down payment assistance programs at various levels of government. One just has to research and use the most powerful and least expensive tool available: the Internet. Many of these programs are focused on first-time homebuyers, lower income homebuyers, and revitalization of neighborhoods. And they have repeatedly been an effective way of getting into a home and away from renting.
USDA Home Value Loophole
Two key factors to remember about USDA loans are that the maps the USDA uses for property values and eligible territories haven’t been updated in over a decade. That information error works to the benefit of the buyer, allowing more homes to be designated rural than really exist. Second, the values are often lower than true market valuation, which means loans are more likely to be approved. Since it is one of the few no-down payment programs available, the USDA program is always worth looking at.
Buying a home in California is possible with little or no down payment, but buyers need to do their research heavily and understand each path’s requirements before engaging. Lots of mistakes happen because folks don’t do their homework and then get frustrated from an impossible situation that can’t be fixed in the middle of the process.