The market crash of 2008 and the resulting banking regulations changed and eliminated many mortgage programs. Lending requirements became much more stringent. Many of the riskier programs, including 100 percent financing programs, were eliminated from many banks. Even so, there are some options for buying a new construction home without putting money down.
What is Considered New Construction?
New construction homes are homes that have recently been built and have not been lived in yet, or are set to be built on a certain lot. For homes that have not yet been built, buyers can usually select from a pre-set number of layouts and can choose from pre-selected finishes and upgrades that the homebuilder provides.
When purchasing a new construction home, you may be able to finance through the homebuilder that is selling you the property. This option may have an easier approval process than a traditional bank, but not so favorable terms. If you are looking for a competitive interest rate and no money down, consider speaking to your local bank about the types of loan programs that they offer instead. The same loan programs should be available for new construction properties that are offered for any other type of home.
No Down Payment Home Loan Options
Homebuyers may wish not to put a down payment on a home for a variety of reasons. Some do not have enough money saved to afford a down payment on top of closing costs, while others do not want to put all their savings into something that they will not see return on for many years. Though it has become more difficult in recent years to purchase a home without any money down, a few options are available.
Proceeds from Current Home Sale
If you are already a homeowner and have equity in your property, you can use that equity as a down payment on a new home. Your current home does not have to have been sold to be pre-approved when applying for a mortgage, but the lender may require that your income supports both mortgages. Note that you will not be able to close on your new home until the proceeds from your current home's sale are available.
If you're not sure if you will be able to sell your home for more than what you owe on it, contact a local Realtor and ask them to pull comparable home sales in your area to see what price your home should be able to fetch. Remember to include about six percent of the sale price in Realtor fees and six percent in closing fees to your bottom line so you have a realistic idea of how much you will truly be able to contribute toward your new construction home.
Credit Union Loans
Having a relationship with a credit union has many benefits, including better financing terms than you may be able to get from a traditional bank. Some credit unions, such as Navy Federal Credit Union for military families or NASA Federal Credit Union for astronauts and their families, may offer 100 percent financing and additional benefits such as no private mortgage insurance (PMI), or higher home loan amounts than a traditional bank will allow.
To find out if you a similar program may be available to you, start by contacting local credit unions and discussing whether they offer zero-down mortgage programs for members. If you find one and are eligible for membership, this may be an ideal solution.
Physician Mortgage Loans
New doctors riddled with student loan debt should have no fear of being approved for a mortgage. Medical residents, fellows, and attending physicians may be able to purchase a new property with zero money down by utilizing a physician loan from a number of lenders.
Qualifications and benefits vary dependent on the lender, but some perks may include no PMI, the ability to use an employment contract as a verification of income, and large loan amounts - in some cases, up to $750,000.
Veteran Loans
VA loans are mortgage loans available to veterans, their spouses, and dependents of a service member on active duty. Veterans may purchase a property up to $417,000 with no money down and without paying PMI.
Qualifications include:
- Completed certificate of eligibility
- Minimum credit score of 620
- Ability to afford the monthly payment
Visit the VA website for more information on this loan option.
USDA Loans
Approved lenders may offer up to 100 percent financing with United States Department of Agriculture (USDA) loans, which are loans for those purchasing homes in a rural area. These loans may be may be applied to new housing, as well as other types of homes.
Qualifications include:
- Living in a designated rural area
- Being a U.S. citizen, qualified alien, or a non-citizen national
- Meeting the moderate to low income rate as designated in your home state
- Being legally and financially capable of paying the loan
- Living in the home as your primary residence
For more information on this loan program, visit the USDA website.
Piggyback Loans
Though most lenders do not offer 100 percent financing, some may offer two loans for one property to borrowers with high credit scores. A piggyback mortgage, which is also called an 80/20 loan, means that a buyer can finance 80 percent of the purchase price as the first mortgage, with the other 20 percent financed through a second loan.
One benefit of taking out multiple loans is that you can avoid PMI since you are technically not borrowing over 80 percent of the purchase price for any one loan. However, these types of loans carry more risk because even if you only default on the second small loan, the bank may foreclose on the property. Second or third loans also carry a higher interest rate than first mortgages, increasing your overall payment.
Land and Construction Loans
If you are looking to build a home on a parcel of land and you would like to contribute to the blueprints and make all the decisions from the ground up, you will likely need a land loan and a construction loan. There is a higher chance of default on these loans, so they usually carry higher interest rates and a higher down payment than a new construction loan. This is probably not the option to choose if you are not looking to put a significant sum of money down.
Weigh the Risks
When you choose not to put any money down on your new construction home, that means that your monthly mortgage payment will be higher, and that always carries more risk. Job loss and a down home market can quickly contribute to a situation where you may not be able to afford the payment on your home, or end up owing more than your home is worth.
If you are unable to come up with the 3.5 percent required minimum down payment for FHA mortgages or three percent minimum for conventional loans, consider waiting on investing in a house until you gain more stability with your finances. A home loan is the largest expense you will have, and it's better to wait on a purchase than end up in a situation that you cannot afford.
Make a Healthy Financial Choice
Purchasing a new construction home with no money down can be a daunting task, but with the right bank and the right program, you may be able to save yourself from spending thousands of dollars up front to purchase the property. If you have a financial advisor, speak to them about whether a zero-down mortgage is the right choice for your family. As with any large financial purchase, consider the pros and cons and make a decision that is appropriate for your family's finances.
