How to move out of a parents’ household is a common question, and it is not just for teenagers. Many first time home buyers of all ages move back into the parents home at some point. A primary reason is to save money rather than spending on rent. Yet, many living rent-free still may not have a down payment saved up. Thankfully, there are a multitude of mortgages to help purchase a home with little to no money down. In many cases, buying a home without a rent history is possible. In this article, it will show the following for the rent-free buyer who is looking to become a homeowner:
- How to save money for a house
- Loan programs that allow living rent-free
- Proving other credit references
- Helpful tips for the first time buyer
- Using gift funds to buy a home
Let’s show how to move out of your parents’ house and buy a first home.
How to Save for a House
Living rent-free with family is a great time to save money for a house. It is actually one of the quickest ways to save for a down payment. That is assuming that a down payment is required or desired. Of course, help out while living with family rent-free, but also take advantage of lower expenses to save money or pay down expenses.
Ideas for buying a home while living rent-free
- Deposit rent & utilities equivalent into a savings account
- Pay off debts with rent equivalent
- Change spending habits
- Stay in or do free activities
- Pay off credit card balances to save interest
There are so many ways to save money. Even if a down payment is not necessary, saving for an emergency fund is a very good thing. To learn 30 quick and simple ways to save a lot of money, click on the button below.
First Time Home Buyer Rent-Free Solutions
Practically every home loan allows loan approval for buyers without a rent history. Although, it is not a guarantee. Not all loan approvals allow a rent-free situation and it depends on the overall situation. First of all, each buyer’s scenario is different from the next buyer. Plus, loan program requirements vary. A buyer with previous credit issues, a borderline credit score, and limited re-established credit may strengthen approval chances with rent history.
- VA loans – Potentially no money down purchase for current service members, Veterans, and surviving spouses
- USDA loans – No money down purchase for buyers and properties meeting USDA requirements
- FHA loans – Low 3.5% down payment
- HomeReady – Fannie Mae program offering 3% down payment and reduced mortgage insurance
- Home Possible – Freddie Mac program offering 3% down payment and reduced mortgage insurance
- Renovation loans – We offer VA Renovation, FHA 203k, and Fannie Mae Homestyle Renovation for purchase/renovation scenarios
- Down payment assistance – We offer the combination of first mortgages with DPA options that vary from state to state
In the chart below, it shows many characteristics common with first time home buyers. Notice the variety of benefits offered by each program and that all allow rent-free buyers.
|Features||VA Loans||USDA Loans||FHA Loans||HomeReady||Home Possible||Renovation||Down Payment Assistance|
|Income Limits||No||Yes||No||Yes & No||Yes & No||No||Yes|
|Min Down Payment||None||None||3.5%||3%||3%||Depends||Possibly None|
|Limited Credit Allowed||Yes||Yes||Yes||Yes||Yes||Yes||Yes|
|Co Signor Allowed||No||No||Yes||Yes||Yes||Depends||Yes, with FHA first mortgage|
|Seller Paid Closing Costs||Yes||Yes||Yes||Yes||Yes||Yes||Yes|
|Min Credit Score||600||620||600||640||640||620||Depends on State|
How to Move Out of Your Parents House – Proving Other Credit
Paying rent is one of the best predictors lenders can use towards a mortgage approval. In cases of living with family, this strong credit reference type is not available. So, it may be beneficial to prove other alternative credit references. Lenders first look at credit reports and scores. The stronger the credit, the lower the chances of rent verification requirement and a higher chance of loan approval, but when a buyer has a limited credit file, that is where proving additional alternative credit comes into play.
What is Alternative Credit
Alternative credit, also known as nontraditional credit, is anything paid monthly which does not report to the credit bureaus. Since these items do not report to the credit bureaus, these do not factor into a credit score. Yet, it doesn’t mean that alternative credit cannot be used. Actually, these credit references could provide a buyer with compensating factors which tip the scales in a buyer’s favor. Below are examples of nontraditional credit references which rent free buyers may use toward qualification.
9 Nontraditional Credit Reference Ideas
- Cell phone
- Auto, motorcycle, or boat insurance
- Life, health, or disability insurance
- Buy here, pay here auto loans
- Small store accounts
- Systematic deposits into a savings account
- XBox Live, Apple, or other online services
- Previous rent history – Don’t forget this as it could work just as well as current rent
Note: Payments made to life insurance or similar accounts through payroll deduction may not count as credit history
How to Prove Nontraditional Credit
In order to prove these additional credit references, a buyer may provide a credit reference letter from the creditor. Another option allows the buyer just to provide the company name, account number, and phone number of the creditor. Then, the lender may request a credit supplement from a credit reporting company. In this case, the credit reporting company will call the creditor and buyer on a conference call to verbally verify the payment history. This information is added a supplement to the buyer’s credit report. Although, this is for internal use only and does not affect credit scores.
If using one of the above credit sources, lenders are looking for these 3 requirements:
- Minimum 12-month credit history
- In the buyer’s name
- Paid on-time
Also, make sure you know the do’s and dont’s related to credit during the mortgage process.
How to Get a Home as a First Time Home Buyer
We have discussed ways for a rent-free buyer to build an approval worthy credit file. There are also other factors which help these first time home buyers who cannot prove rent. Picture a set of scales with 5 weights on each side. The loan approval/loan denial scale starts in balance. Right away, we need to take one weight from the approval side since we do not have a rent history. We are now leaning towards a denial. Don’t worry!
This means we need to build and point out the positive aspects of the buyer’s scenario.
Ways to Tips the Scales in a Buyer’s Favor
- Down payment
- Using own funds for down payment (not a gift)
- Assets in reserves after closing
- Stability of employment
- Lower debt to income ratio
- High credit scores
- Recent prior rent history
Even though these items may not be necessary for a rent-free buyer approval, the more a buyer has, the better the chances of tipping the scales into the approval side.
How to Move Out of Your Parents Housing Using a Gift
Living with family rent-free certainly provides first time home buyers a great head start when it comes to becoming a homeowner, but what if the rent savings went towards paying down debts or an unexpected expense? Even further, what if the loan program requires a down payment or the seller won’t pay closing costs? That is where gift funds could save the day! Notice in the chart we referenced above, that all programs allow gift funds. Therefore, any allowed source may gift funds or even equity to a buyer to help qualify for buying a home.
The definition of a gift is when a person or allowed entity provides funds to the buyer with no requirement or expectation of repayment. Gift funds must be documented from the allowed source to the buyer. Reasons for a gift includes paying down payment, closing costs, or debt balances. Thus factoring gift funds into the equation, a buyer strengthens their position when it comes to buying a house.
Each loan program treats gifts a little differently as far as allowed gift sources, documentation requirements, and what it may be used for. That is another way that an experienced loan officer can help a buyer achieve the loan approval.
How Does a Gift of Equity Work?
Sometimes there is an opportunity to purchase a home from a family member. Not only that, but it may be sold at a discounted purchase price to the family member. Bonus! In a case like this, the seller may actually gift the equity to the buyer. Basically, on paper, the equity is used as the buyer’s down payment and/or closing costs. In many cases, a buyer may not have to bring any of their own money to closing. With enough equity, even the seller may not have to bring money to closing. Talk about a win-win!
When using a gift of equity purchase, there are certain requirements to follow.
Gift of Equity Requirements
- Must be closely related
- Cannot be an entity. Must be a person
- Completed gift letter required
- Purchase contract states the buyer and seller relation
- Sufficient equity in property proved by lender-requested appraisal