How to Buy A House With Little or No Money Down

There is a little known way to buy a house with no or little money down. We have done it 4, almost 5 times (if the purchase hadn’t fallen through), and it’s how we bought our first house for our family.

How to buy a house with no money down

Before reading further, it’s important to know these things:

*Buyers must meet regular income and employment requirements from their mortgage lender, and be approved individually by their banker*

*Must be ready to work*

*Does not apply to everyone*

*Have extra money set aside, just in case*

How To Buy A House With No Money Down

We have bought houses with almost no money down or no money down through a construction loan. Traditionally, construction loans are used for building new homes, which do require 20% down. But you can also take out construction loans on homes you are renovating.

Most recently we used this during our house move. We ended up having to bring a little money to the table. But this was only because our banker recommended we use a certain in-house loan because we had such a time constraint, and that loan was only approved up to a certain amount. We had to bring a little bit of the difference over that, but it wasn’t anywhere near 20%.

If the home you are buying has an after-renovation loan-to-value of 80%, you don’t need to put any money down on the house. And if you want to put literally zero money down, you can ask the seller to contribute to your closing costs. Sometimes the house might even appraise high enough to fit the closing costs in yourself (However, in this market it would take more searching to find a seller to do that, but it can be done).

There are a few other things to note with construction loans

You need to estimate the cost of work fairly accurately, otherwise you will be covering the cost of the projects yourself.

Work must also be completed within a set time frame, usually within 9 months to a year.

The home you are buying must also appraise out, or you will need to cover the difference by bringing money to closing.

After the work is completed you must refinance out of the construction into a conventional loan. This requires closing costs, but if there is room in the valuation of the home these can be rolled into the loan as well.

Another huge perk of going this route is that you don’t have to pay Private Mortgage Insurance, or PMI. This is a monthly expense that you pay every month to insure your mortgage until you have at least 20% equity in your home. PMI is around $1,500-3,500 per year, so this is a noticeable savings.

This method definitely had stressors, but to the right buyer, it can be an awesome and wealth building secret!

Challenges that May Arise

A couple of times our appraisal has come back extremely low, which meant that while we should have been able to cover all of the costs and then some within the loan, we had to bring some money to closing. So it didn’t turn out to be a complete no-money-down purchase. Note, we sold this home I am referencing for $111,000.00 more than what the appraiser said it was worth 6 months after the appraisal. And this was NOT a $500,000 dollar home. When we appealed her extremely low valuation, she accused us of just seeking a certain dollar price. I still want to send her the sold listing just 6 months after her terrible appraisal….but I have restrained. Becuase of that we had to bring ~$10,000 to the table, but if we were purchasing the house normally it would have been 20% plus closing costs of about $7,000.

If you do have issues with your appraisal, have your banker contest the appraisal through the bank, and have your realtor submit comps that support the valuation you believe it should be at. We have had luck with this in the past.

There also are likely to be expenses that arise during construction that you may need to fund out of pocket. In order to refinance your construction into a conventional loan, the work on your sworn construction statement needs to be completed. That means if you find an extra problem during the renovations, you will need to fund it yourself.

We highly recommend that anyone going this route has or can get extra funds for unforeseen things that arise. If nothing happens, which has been the case for us other times, you will just have extra money for something else!

Finding A Bank

Some banks don’t offer this loan option at all, or only offer it to buyers who hire a licensed contractor to do the work. It’s possible to hire a contractor to do the work, but much less likely you will have an after-appraised loan to value of 80%. There are some homes out there with enough profit potential where it may be worth it, but it’s likely you will end up needing to bring a lot of money to the table if you hire a contractor.

We have had luck with credit unions and smaller local banks that allow homeowners to sign their own sworn construction statements, allowing them to do the work on their own construction loans.

(If you are local to Duluth, Minnesota send us an email for some good local lenders who work with homeowners on this)

You need to refinance out of your construction loan after the work is complete, usually within 9 months or 1 year. You will need to pay for closing costs in order to refinance. Sometimes your home may have appraised so high initially that these costs may be covered as well, but not always. This is another reason we recommend having some money saved before embarking on a project like this. (Our closing costs are usually ~$5,000-$7,000). Well worth the expense to have a bunch of equity in your home!

Also, for anyone who doesn’t know, if you own your home for 2+ years, you pay NO taxes at all on any money you make on your home!!!

More About The Process

If you would like to pursue this option, you will need to:

  • Find a bank that will allow you as the homeowner to act as the contractor on your home and sign your own “sworn construction statement” (more on that below)
  • Be approved by your bank for the loan
  • Learn how to bid your projects. Take your time to research if you need.
  • Write out your sworn construction statement, which is a legal document saying how much the renovations will cost.
  • Complete all renovations within your banks’ timeline, usually 9-12 months
  • Refinance out of your construction loan into a conventional loan, which remember will require additional closing costs at that time.
  • You are practically guaranteed to have 20% equity in your home, as the bank usually won’t finance more than that. All of that work is now tax-free when you sell down the road!

We hope this article was helpful and helps you buy a house with no money down!

Let us know if you have any questions by commenting below or by sending us an email.

Real Estate

January 10, 2023

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