The transition from renting to buying a home may seem intimidating. If you are concerned about paying a down payment and covering the closing costs, we have a few solutions that may help move things forward.
Are you a rate watcher who notices how interest rates have been ticking up? Maybe you are worried that the opportunity for home ownership is slipping away. Meanwhile, the other side of the coin is increasing as much or more. According to the Census Bureau, rents just hit an all-time high. During the 3rd quarter of 2018, the nationwide median asking rent topped $1,000 for the first time. Even with mortgage rates increasing, it is important to remember that rental prices are rising as well. Plus, renting means gaining zero equity in real estate.
It is possible to buy a home with a no down payment mortgage, possibly include closing costs in the transaction, and delay the first payment due date.
“It is possible to bring absolutely no money to closing, maybe even get back a portion or all of the earnest money back, and the cherry on top is no mortgage payment until almost 2 months after closing.”
No Down Payment Mortgage – First Time Home Buyer
We provide at least three home loan options for as little as no down payment. These include VA loans, USDA Rural Development loans, and down payment assistance products. These home loan products offer first time home buyers an opportunity to achieve the American dream.
VA Loans – No Down Payment Mortgage #1
VA loans offer an excellent opportunity for those currently in the service, Veterans, disabled Veterans, or a qualified surviving spouse. Not only does it provide the ability to buy a principal residence as a no down payment mortgage, but it also offers affordability. The Veterans Administration allows for qualified buyers to buy without having to pay monthly mortgage insurance. This can create a big advantage when compared with other low to no money down programs. Furthermore, guidelines are incredibly flexible which allows more buyers to qualify. VA is flexible in areas such as credit score, debt to income ratios, student loan debt, property type, and more.
USDA Rural Development – No Down Payment Mortgage #2
USDA loans are a great way to buy a home with no money down payment mortgage. Other than highly populated areas, most areas in the U.S. are eligible. USDA does have a maximum household income limit. Although, it is a very liberal income limit. Like VA, USDA loans are very flexible when it comes to a buyer’s qualification including down to a 620 credit score. This is not a loan just for perfect credit scores and high-income borrowers. In addition to the no down payment feature, USDA loans offer the lowest mortgage insurance and funding fee among government loans offering low cash to close. USDA mortgage payments are very affordable to first time home buyers.
Down Payment Assistance – Possibly No Down Payment Mortgage #3
Sometimes a no money down payment mortgage is not an option, so a loan such as FHA comes to play. FHA requires a 3.5% down payment, but when coupled with down payment assistance, the result could be a no down payment purchase. Down Payment Assistance (DPA) programs vary from state to state. It is important to remember that these programs are offered through state lending agencies, yet buyers must go through mortgage lenders. The same mortgage lender provides both the first mortgage and the DPA or grant.
Details on state-specific programs may be found in the following articles: North Carolina down payment assistance, South Carolina down payment assistance, and Virginia Housing Development Authority (VHDA) Grants & DPA.
Some states offer a set amount of DPA, where some programs offer a percentage of the first mortgage amount in assistance. Furthermore, the guidelines, interest rates, and format vary as well. The primary objective of down payment assistance is to bridge the gap between the purchase price and the first mortgage loan amount. Therefore, most or all of the down payment could be covered. Maybe even a portion or all of the closing costs too.
What If I am Not a First Time Home Buyer?
We have mentioned how these programs help first time home buyers. VA, USDA, and some DPA programs are not restricted to just first time buyers. That’s right, as a repeat buyer, it is possible to:
- Have more than one VA loan at once
- Sell a home and buy with a no money down payment mortgage again
- Waive the VA funding fee for disabled Veterans
Cover Cash to Close With Seller Paid Closing Costs
A no down payment mortgage may cover the purchase price, but what about a way to cover closing costs? Buyers may not have the funds to pay closing costs, the first year of insurance(s), and escrows for taxes and insurance. Other times, buyers may have the funds but prefer to hold onto the cash. That is where another strategy comes into play – requesting seller paid closing costs. This means including a certain amount within the offer to purchase contract which covers closing costs. It means the buyer is asking that the seller pay X amount in costs at X purchase price.
An experienced lender can create a strategy with a buyer and their Realtor before making an offer. This strategy would include calculating the amount to cover estimated closing costs. With enough accuracy, in the beginning, it is even possible for the buyer to cover expenses and also receive a portion or all of their earnest money deposit back at closing.
This home purchase thing is sounding pretty good. No money down mortgage and even potentially no cash at all to closing? Now, what about delaying that first mortgage payment? Let’s discuss what completes this buyer’s trifecta!
Closing Date, First Payment, & Per Diem Interest Explained
First, let’s explain the due date and how to use the closing date as a way to create a payment strategy. Mortgage lenders prefer the mortgage payment due date on the first of the month. To understand daily interest, it is best to know how interest is charged. First of all, think of rent. When rent is paid on the first of the month, it pays ahead for the next month. For instance, an April 1 rent payment pays ahead for April’s rent.
Conversely, a mortgage payment pays the prior month’s interest. This is called paying in arrears. Therefore an April 1 mortgage payment pays interest that has accrued for March. See the difference? Rent pays ahead, and mortgage interest is paid in arrears.
Each day the borrower owes a mortgage balance, interest is charged based on the rate, term, and balance. We just mentioned how the mortgage payment is due on the first of the month and it pays for the previous full month. Unless the closing is on the first of a month, the lender must calculate a partial month charge or credit of interest.
Per Diem Interest Example
Let’s say the mortgage closing is on March 27th, which makes the first payment due May 1. Using what we learned above, the May 1 payment covers April’s mortgage interest. but the borrower also had the loan for a partial month (March 27 – April 1). Is it interest-free during this time? Sorry, but no. Therefore, lenders charge per diem interest at closing to cover this partial month. In this example, there would be five days of per diem interest charged to the borrower (28th, 29th, 30th, 31st, 1st for a total of 5 days). The dollar amount of interest per day would be multiplied times 5 in this case.
Why Close at the End of the Month?
A majority of buyers’ purchase closings are scheduled during the last couple days of the month. Many do not even know why they have chosen the busiest day of the month to close. The most common reason is to avoid paying daily or per diem interest at closing. If there is a way to avoid cost, most will take it.
Typically, renters have paid rent through the end of the month they are closing on a new house. Therefore, they have canceled their lease. So, buyers want to do two things: Have at least a month before their first mortgage payment is due and limit the daily interest cost at closing. Thus, the reason to close at the end of the month.
Although, it is highly advised not to schedule a closing at the end of the month blindly. There are potential strategies for buyers.
Why Not Close at the End of the Month?
When closing at the end of the month, there is the benefit of bringing a little less to closing in the form of per diem interest, but there are reasons to consider other closing dates.
- Avoid the end of the month rush
- Easier to move
- Delayed first payment date
Think about it. Why choose to close when most others are? Closing on the last day means the closing attorney will have their schedule jam-packed for the day. That means there is usually not much flexibility for delays. Also, the end of the month can create backlogs with mortgage lenders, appraisers completing re-inspections, builders, and more.
Plus, imagine renting a moving truck or hiring a moving company. The end of the month is their busiest time. The choices may be limited for buyers or sellers looking to move. There may even be discounts for slower times of the months.
Finally, choosing another day of the month could mean more time before the first payment is due.
How to Delay the First Payment Due Date
Did you know that it is possible to delay the mortgage first payment date for almost two months? We explained how per diem interest works. Additionally, closing at the end of the month lowers per diem interest due at closing.
The third reason to choose another closing date is to delay the first payment date. Let’s use our example above for closing March 27th and a first payment due date of May 1. Let’s say that doesn’t work for the buyer. Maybe another month of rent is due. Typically, a buyer doesn’t want to make rent and a mortgage payment in the same month. What if the first payment could be two months later on June 1? There is a solution.
First Payment Solution
Rather than closing on March 27th, request a closing date for April 2nd. Closing a few days into the month gives the buyer two options. One is an interest credit of one day but still has the payment due May 1, but the other option (which stretches the due date to June 1) could be the solution. Remember what we said about collecting per diem interest for the remainder of the month. In this case, interest is collected at closing from April 2nd through May 1. This is 29 days. 29 days of daily interest due at closing is much cheaper than a full monthly mortgage payment including principal, interest, taxes, insurance, and mortgage insurance.
Bonus solution! Now, another option for the buyer paying the per diem interest at closing. Request that the seller pays it. Imagine using one of the no down payment mortgage programs mentioned above with a seller paid closing cost strategy. That means it is possible to bring no money to closing, maybe even get back a portion or all of the earnest money back, and the cherry on top is no mortgage payment until almost two months after closing.
“No Down Payment Mortgage + Seller Paid Closing Costs + Delayed First Payment = Happy Homeowner!”