Posted on November 7, 2018 - 11:23 AM
by Jacob Skiles
Pssst ... wanna know how to buy a house for just $10,000 upfront, max? No, this isn't a scam, or a ploy to lure you into purchasing some rickety shack in the middle of nowhere. We're talking about a nice house in a nice neighborhood—for no more than a hundred Benjamins.
We get why you're skeptical, given the high price of homes today. According to realtor.com data, America's median home price rose 7% last year to $295,000. And since many assume a 20% down payment is required to buy a home, that would amount to you coughing up $59,000 before you ever move in! No wonder many of us expect to spend years scrimping and saving to be able to make our home-buying dreams come true.
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But here's a reality check: The upfront costs of buying a home have a lot more wiggle room than you might think.
It largely comes down to trimming two variables: your down payment and closing costs. Here's the scoop on how to whittle these down to size so all you need is $10,000—or even less—to buy a home of your own.
How to buy a home for $10,000: Tips to trim your down payment
Here's the secret, in a nutshell: Yes, a 20% down payment is traditionally recommended for conventional loans since it allows you to avoid paying an extra monthly fee called private mortgage insurance (PMI). But that doesn't mean 20% is necessary.
As such, the first key to buying a home for $10,000 or less is to take out a mortgage that requires little money down, or no down payment at all. There are four options available.
Veterans Affairs loans
If you or your spouse serve or served in the military, you may qualify for a Veterans Affairs (VA) loan. Under this program, the VA guarantees the loan, reducing the risk to the lender. You can finance up to 100% of the house's cost, so you won't have to come up with any money for a down payment. Just keep in mind that there are minimum requirements for your income and credit score that vary by lender, so it's a good idea to shop around for a VA loan to ensure you get the best deal.
There are some fees associated with VA loans, but they can be rolled into the total loan amount that you make payments toward monthly.
According to Jennifer Beeston, vice president of mortgage lending with Rate.com, there are many myths about VA loans that cause people to avoid them.
"Many veterans do not use their VA loans because they hear they are too difficult," she said. "But honestly, VA loans are very easy and offer a tremendous benefit to the borrower."
The U.S. Department of Agriculture offers loans to Americans with low to moderate incomes who want to buy a home in a rural area. Like with VA loans, you can borrow up to 100% of the home's cost, eliminating the need for a down payment. USDA loans do have some fees, but you can roll them into the mortgage.
"USDA loans are fantastic loans that many people do not know about, but should," Beeston says.
You'll need to pay ongoing fees for mortgage insurance, he notes, but it's less than an FHA or conventional mortgage.
If you don't qualify for VA or USDA loans, another option to consider is a Federal Housing Administration (FHA) loan. With an FHA loan, you still have to come up with a down payment, but it's only 3.5% of the home's price.
For the median $295,000 home, that would mean a down payment of $10,325. On a $150,000 home, you'd only have to put down $5,250. Depending on where you live, that could be enough to buy an excellent house in a great area.
The one downside? Because you're making a small down payment, you will need to pay mortgage insurance (PMI). But you can roll that cost into your total mortgage.
Credit union loans
Some credit unions offer mortgages that require only a small down payment, or no payment at all. It's wise to check out local credit unions in your area to see what kind of home loans they can offer you.
How to lower your home closing costs
Even if you get a home loan that covers 100% of the home's cost, you typically need to come up with thousands of dollars to cover closing costs. Those are the fees paid to third parties who facilitate the sale of a home. They include the loan origination fee, credit report fee, title search fee, and more.
While closing costs vary widely, they typically total 2% to 7% of the home's purchase price. So on a $295,000 home, your closing costs would amount to about $5,900 to $20,650.
However, that doesn't necessarily mean you have to raise that money yourself. There are two other ways to cover closing costs.
Ask the seller to cover it
One of the best ways to pay for closing costs is to negotiate with the home's seller to cover some or all of the costs. Depending on the housing market in your area, sellers may be anxious to close a deal quickly and will be more motivated to pay for your closing costs just to get the sale over with. If you show a willingness to close quickly, you will have more bargaining power.
"If you have zero money saved, I have seen Realtors ask the seller to cover 3% of closing costs," said Beeston. "If the house is under $150,000, you may need to ask for more than 3%, but that's something the Realtor can negotiate."
Look for closing-cost assistance programs
A number of states offer first-time home buyer programs and closing-cost assistance grants. In return for a commitment of living in your new home for at least a few years, you can get a grant to help with closing costs. To find programs near you, check out your state housing authority.
Bottom line? When it comes to buying a home, we typically expect to spend years scraping up enough money to cover a down payment and closing costs—but that might not be necessary. There are plenty of ways to downsize not only your down payment, but those pesky closing costs to put homeownership within reach for as little as $10,000, or even less.