No Money for a Down Payment? Here's How You Can Still Buy a House

If you want to buy a house but have little to no money for a down payment, you may still be able to do so by getting an FHA-insured mortgage.

Apr 13, 2014 at 12:22PM

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If you want to buy a house but don't have enough money to make a 20% down payment, there's still a way to get a mortgage.

Known as an FHA loan, these require as little as 3.5% down and are a popular option for people who can easily afford a monthly mortgage payment but can't spring for a huge one-time lump sum.

Added to this, it isn't necessary to have perfect credit to get approved for a mortgage by the FHA. "Generally speaking, to get maximum financing on typical new home purchases, applicants should have a credit score of 580 or better," explains the FHA website.

That compares to a minimum credit score of 620 that most mortgage brokers are willing to entertain and of 740, which qualifies a borrower for the absolute best mortgage rates available -- scroll through the presentation below to learn how to improve your score.

Another benefit of an FHA mortgage is that the mortgage is assumable. If you decide to sell the house, the buyer can simply take over the existing mortgage as opposed to applying for a new one. This option isn't available for most other mortgages and it's particularly beneficial in a rising interest rate environment as it locks in a lower rate for future purchasers.

Now, as you might have expected, there are downsides to pursuing this route, the biggest of which are two added insurance expenses. The first is due at the time of closing and is known as the up-front mortgage insurance premium, or MIP. This is equal to 1.75% of the loan amount.

The second and related premium is the annual MIP, which is billed monthly throughout the life of the loan. This is the government-issued counterpart to private-label mortgage insurance. The specific rate is a function of the property's loan-to-value ratio as well as the size and duration of the mortgage itself.

The following table shows how the annual MIP is determined. The column on the far left shows the loan amount. The next one over is the loan-to-value ratio. And the third column shows the cost of the insurance in basis points -- each point equates to 0.01% of the total loan amount.

Base Loan Amount

Loan-to-Value Ratio

Annual MIP (Basis Points)

Less than or equal to $625,500

Less than or equal to 95%

130 bps

Less than or equal to $625,500

Greater than 95%

135 bps

Greater than $625,500

Less than or equal to 95%

150 bps

Greater than $625,500

Greater than 95%

155 bps

Source: Federal Housing Administration.

As you can see, while FHA mortgages are a great alternative if you want to buy a house but can't afford a massive down payment, they present their own unique set of qualities, one of which is that they're more expensive as a result of the insurance.

That being said, the FHA route provides an affordable avenue to homeownership for people who may not otherwise have the opportunity to participate in the American dream.

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