Find your cheapest way to buy a house
Cheap houses are in short supply these days. But that doesn’t mean first-time buyers are priced out of the housing market.
Many buyers can easily afford monthly mortgage payments. Their only challenge is finding cash for a down payment and closing costs.
Luckily, there are plenty of ways to reduce your down payment and closing costs so you can get into a house without the upfront barrier.
You can mix and match these strategies to find the cheapest way to buy a house for you. If you’re lucky — or crafty — you might be able to move in without paying much out of pocket at all.
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1. Use a no-down-payment mortgage
A zero-down-payment mortgage might sound too good to be true. But two types of loans offer precisely that:
- VA loan
- USDA loan
If you qualify for either one, you’re a long way toward moving into your own home with few or no upfront costs.
You’ll only get a VA loan if you’re an active-duty service member, veteran, or part of an associated group, like surviving spouses. These mortgage loans are backed by the Department of Veterans Affairs, and they’re meant to make homeownership more affordable for those with a service history.
If you do qualify, this is likely to be your cheapest way to buy a house. The benefits of a VA mortgage include:
- No down payment required
- Limited closing costs
- No continuing mortgage insurance
- Typically the lowest mortgage rates around
- Flexible credit requirements
VA loans do require an upfront funding fee. But this can be included in the loan amount so you don’t have to pay it in cash.
Other VA loans closing costs have to be paid at closing. But read on for programs that can help lower your out-of-pocket funds. Some borrowers with VA loans really do move in without paying a cent upfront.
USDA loans are another zero-down option offered by the U.S. Department of Agriculture. As the name implies, to get a USDA loan, you need to be buying in a designated “rural area” — but that includes 97% of the U.S. landmass.
You must also have a household income that’s low-to-average for the area where you’re buying. There are other rules, but if you clear those two hurdles, there’s a good chance you’ll qualify.
Like VA loans, USDA mortgages offer:
- No down payment
- Often below-market mortgage rates
- Reduced mortgage insurance costs
Those who qualify may be able to get help with closing costs from down payment assistance programs (more information below).
USDA loans do require ongoing mortgage insurance, but premiums are cheaper than other low-down-payment loan types.
This is an excellent, low-cost way to get your foot in the door as a homeowner.
2. Use a low-down-payment mortgage
Don’t worry if you’re not eligible for VA or USDA loans. Because there’s a good chance you can get into a new home with just a 3% or 3.5% down payment.
Home buyers with less-than-perfect credit should look into an FHA loan. If your score is 580 or better, you may well qualify with a down payment of only 3.5% of the purchase price.
Be aware that the FHA requires borrowers to pay mortgage insurance premiums (MIP) over the life of the loan, which could end up being more costly in the long run. The good news is that FHA loan holders can drop MIP by refinancing into a conventional loan down the road.
And the news is even better if your FICO score is a bit higher.
Many with a credit score as low as 620 qualify for a conforming loan from Fannie Mae or Freddie Mac. And those offer down payments as low as 3%.
None of these loan programs require a “minimum borrower contribution.” That means no money has to come out of your own pocket for the down payment or closing costs.
You can cover all your upfront fees using grant money, gifted money, or down payment loans if you qualify for assistance.
3. Get a gift, grant, or DPA loan to cover your upfront costs
We’ve mentioned that first-time home buyers can often get help with their down payment and closing costs. Here’s how that works.
Home buying grants and loans
Down payment assistance programs (DPA) should be more famous than they are. There are thousands across the country, with at least one (usually several) covering every state or county.
Each DPA program is independent and has its own rules and offerings. So we can’t say you’ll get “x amount” if you meet “y requirements.” But eligible buyers often receive thousands of dollars toward their down payment and/or closing costs.
You should explore all the DPA programs that operate in your area and apply to the ones you think might help. Look up programs online or ask your loan officer, Realtor, or real estate agent for suggestions.
If you’re lucky, you might get an outright grant (a gift) that covers some or all of your down payment and closing costs.
Or you might get a loan that only has to be repaid if you move — and even then, that could be forgiven if you stay in the home for a certain number of years.
The worst case, assuming you’re approved, is that you get a low-interest loan that you pay down in parallel with your mortgage. But that’s a pretty good “worst” case.
Many parents and grandparents take real joy from helping younger members of their families to buy homes with a cash gift toward their down payment. Lenders recognize that. And nearly all are okay with it.
However, there are rules that apply in these circumstances:
- It must be a real, outright gift, not a loan dressed up as a gift
- The giver must provide a formal gift letter, confirming the arrangement
- There must be a clear paper trail, showing the money transferring from the giver’s to the recipient’s account
Of course, it doesn’t have to be a parent or grandparent. Any member of your family will do. And there’s nothing to stop a friend making the gift. But the more distant the relationship, the harder you might find it to persuade the lender that everything’s legitimate.
4. Get the seller or lender to pay your closing costs
Closing costs can be expensive — often 2% to 5% of your loan amount. This may come as a surprise for first-time buyers who only saved and budgeted for a down payment.
If you’re having trouble coming up with cash for closing costs, there are a couple of creative ways you may be able to get them covered.
One way is to negotiate “seller concessions.” This means convincing the seller to pay some or most of the buyer’s closing costs. You might pay a slightly higher purchase price in exchange (which would be covered by your mortgage loan).
Seller concessions are common in some areas. But don’t get too excited. Sellers are under no obligation to help you. Moreover, they’re likely to do so only when it’s in their interests, too.
These arrangements arise most often when a seller is eager to sell and you’re the only potential buyer on the horizon. Or when your offer is so much higher than the other(s) that it makes sense to make a concession.
Note a couple of points. First, the seller pays nothing, and instead receives less at closing. And secondly, there’s an absolute rule that this “kickback” is strictly limited to actual closing costs, like buyer’s agent commissions and origination fees. You can’t receive cash-back.
There are also limits to concessions — usually around 3% on low-down-payment loans.
Lender credits involve the mortgage company paying some, most, or all of your closing costs. Some lenders will cover only their own fees. Some will pay third-party charges, such as the appraisal fee. And some will cover the lot, including property taxes and homeowners insurance due on closing.
Of course, lenders aren’t in the business of free lunches.
In exchange for lender credits, you’ll typically pay a higher mortgage interest rate. And you can be pretty sure you’ll pay more in the long run than the costs you save.
However, if money’s tight when you close, you may think that’s a price worth paying to become a homeowner. And, you may have an opportunity to refinance into a lower rate later on.
5. Consider a fixer-upper
If you watch lots of HGTV, you might think buying a fixer-upper below market value and remodeling it is simple. But even professionals sometimes hit problems while renovating their investment properties, and DIY projects can snowball for amateurs.
Generally, a fixer-upper is a structurally sound home in need of mainly cosmetic improvements. As a first-time buyer, unless you’re a professional contractor, you’ll likely need to hire someone to make renovations. And that can be pricey.
Still, the appeal of a fixer-upper is the affordability and potential to increase its home value. If you get lucky with a property and are prepared to put in some sweat equity, there are real savings to be made from fixer-uppers.
Dave Ramsey’s website estimates you can save an average of $60,000 on the home price — and more through your smaller down payment and mortgage.
If you want to go this route, there are affordable financing options available.
One valuable loan option is the FHA 203k mortgage, which covers your home purchase and repairs with a single loan. Even better, it has lenient credit score and down payment requirements, just like the standard FHA mortgage.
6. Buying a foreclosure or short sale home
There aren’t nearly as many cheap, good-qualify foreclosure or short sale homes on the market as there once were. But there are still good deals to be had if you search for them online or by looking for realty signs in your target area.
The foreclosure or short sale process is a little more complicated than the standard home buying process, so you’ll want to read up on the details before jumping in.
With a short sale, you’re still buying from the owner. The bank or mortgage lender has indicated that it will permit a sale for less than the current mortgage balance. But it rarely sets a dollar amount. So you make an offer to the owner and the bank decides whether it will permit the sale.
But this decision process can take a long time. Stories of banks taking six months to respond to short sale offers are commonplace. And there’s always a risk of the purchase falling through.
Yet, if time is your friend and patience is your biggest virtue, you could pick up a real bargain through a short sale.
If the home fails to sell through a short sale or if the bank chooses to skip that step, the property is foreclosed. The lender seizes ownership, evicts the occupiers, and usually offers the home for sale by auction.
Most foreclosure auctions require payment in cash. So, absent those funds, you won’t be able to participate. A few allow mortgages. But that will involve a heap of preparatory work and the risk that you’ll be outbid.
If a home fails to sell at auction, it becomes “real estate owned” (by the bank). These REOs can be a source of great bargains.
But be aware, there may be reasons why a home failed to sell at auction. So caution is again important, and a professional home inspection is critical.
7. Improve your finances before buying
If you really want the cheapest way to buy a house, you should make sure your finances are in good shape before you apply for your mortgage.
But don’t let “perfect” be the enemy of “good.” If you wait until everything is the best it can possibly be, you risk missing out on the benefits of homeownership over the years while you’re making improvements.
So, in the year or months leading up to your mortgage application, do your best to:
- Increase your credit score. Even a small improvement to your credit report can earn you a worthwhile reduction in your mortgage rate
- Reduce your existing debts. Paying down high-interest debt, like credit cards and personal loans, will have a positive impact on your debt-to-income ratio (DTI), a key measure of mortgage eligibility
- Resist opening new credit accounts or (counterintuitively) closing existing ones. This can have a negative impact on your score
- Boost your savings. A down payment that’s just a bit higher than the minimum could get you a lower rate. And lenders like to see those extra “cash reserves,” as they make you a more reliable homeowner
Nobody expects miracles. But every little thing you do now could pay dividends when you get your mortgage quotes.
And, of course, you’ll want several of those quotes. Because comparison shopping among multiple lenders is one of the best ways to find your cheapest mortgage. You’ll save money upfront and over the life of the loan.
Cheapest way to buy a house
So there we are. Those seven strategies should help you become a homeowner sooner and at a lower cost.
Generally, the process for buying a cheap house can be boiled down to:
- Choosing the right mortgage for your needs
- Getting all the help you can with the down payment and closing costs
- Considering all types of properties. But be cautious with fixer-uppers, short sales, and foreclosures unless you’re a professional
- Working on your finances before applying for your mortgage. The earlier you start, the easier it will be
- Getting a mortgage preapproval before you house hunt. This will show you your “real” home-price range
- Shopping around for your best lender
Do those and you should be set up for success. Instead of scouring the real estate market for “cheap homes,” your first house could be your dream home.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.