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Home buying with no money down
If the only thing standing between you and homeownership is a downpayment, consider your options.
December 23, 2003: 5:28 PM EST
By Sarah Max, CNN/Money Staff Writer

BEND, Ore. (CNN/Money) Ė Up until a year ago, photographer Melissa Jansson, 30, planned to rent for the foreseeable future. At that point, the few hundred dollars she had in savings wouldn't even cover her closing costs.

In November, Jansson closed on a $150,000 home of her own with a 3 percent downpayment she scored through a grant from the state of Oregon for qualified first-time homebuyers. Even better, she found a seller willing to pay all but $12 of her closing costs.

"Until I heard about the grant program buying a house was a fantasy," said Jansson, who shares her two-bedroom, two-bathroom home with a roommate and ultimately pays only $40 a month more to own than she did to rent.

Very little down

"No-money-down home purchases used to be the kind of thing you only saw on late night TV," said Keith Gumbinger, vice president for HSH Associates.

Now they're in the mainstream.

In fact, according to a survey of buyers conducted in early 2003 by the National Association of Realtors, less than half of all buyers put down 20 percent. Among first-time buyers, 33 percent kicked in less than 10 percent of the purchase price, while 28 percent financed the entire price of the home.

"Fannie Mae and Freddie Mac will even lend 103 percent of the homes value," said Gumbinger, noting that the extra 3 percent would be used to pay for closing costs. "You need to have very good credit to qualify for this kind of loan."

How much did they put down?
The majority of first-time buyers had downpayments of less than 10 percent.
Size of downpayment†First-time buyers putting this much down†
0% †28%†
1%- 9%†33%†
10%- 19%†16%†
20% - 29%†14%†
30%- 39%†3%†
40% - 49%†2%†
More than 50%†5%†
†Source:††National Association of Realtors

In general, the less you put down, the better your credit needs to be. Also, smaller downpayments typically mean slightly higher interest rates, not to mention private mortgage insurance (PMI).

While small downpayments are common, private lenders still require that borrowers who put down less than 20 percent pay PMI, which protects them if you default on your loan. Depending on how much you put down, the size of the loan and the type of loan, this could easily add a couple hundred dollars to your monthly payment.

"If the prospects that your home will appreciate in value are good, paying PMI is not the end of the world," said Greg McBride, a senior financial analyst for

After two years, PMI is automatically cancelled if your home's increased value brings your share of equity to 22 percent, said Gumbinger. If you don't want to wait that long, you can request that your lender drop PMI when your equity reaches 20 percent or refinance at that point.

Piggyback loans

Homeowners who don't have 20 percent for a downpayment and don't want to pay PMI can opt for a piggyback loan, which is essentially a home equity loan that funds a portion of the downpayment.

With an 80-10-10 loan, for example, the buyer contributes 10 percent of the home's price, borrows 80 percent with a traditional mortgage and borrows another 10 percent with a second mortgage. Similarly, the 80-15-5 allows the buyer to put 5 percent down and borrow the extra 15 percent via a second loan.

Brad and Lori Jarvis started out paying PMI on their Spokane, Wash., home, which they bought for $143,000 with only 5 percent down. Then they refinanced, borrowing $115,000 from their first mortgage and another $20,000 from a home equity line of credit. Now, instead of paying PMI every month, they put $200 toward their home equity debt.

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One advantage of this route is that you can deduct the interest you pay on a second loan. And, depending on how aggressively you pay off the second loan, a portion of your payments will go toward building equity.

The disadvantage of a piggyback loan is that it could take as long as 10 years to pay off your second loan, while appreciation of your home's value may get you out of paying PMI in just a couple of years, said McBride, noting that interest rates on second loans are typically higher than rates on first loans.

Downpayment programs

Depending on where you live, what you earn and even what you do for a living, you may qualify for a housing program that will make it easier to buy a home with little or no downpayment.

"I bet people would be surprised to learn that they are closer to home ownership than they think," said Brian Sullivan, spokesman for the U.S. Department of Housing and Urban Development (HUD), which gives state and local governments more than $2 billion in annual grants for housing initiatives, including downpayment assistance programs.

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Such programs vary greatly and are available to all sorts of buyers. One of the largest is geared toward active and retired military personnel through the Department of Veterans Affairs. More than 29 million veterans and service personnel are eligible for VA loans, which are often made without any downpayment and frequently carry lower-than-average interest rates.

In and around Boston, meanwhile, people who buy a home near public transportation and can prove they are regular patrons of public transportation may qualify for the "Take the 'T' Home Mortgage Program" and borrow 100 percent of the price of a home without paying PMI. Like most such programs, there is an income cap. In this case it's 135 percent of the area's median income, or $109,000 in Boston.

Under HUD's Teacher Next Door and Officer Next Door programs, teachers and police officers in some communities can buy HUD-owned homes for half of the list price, typically with very little down. And, depending on where you live, you may qualify for grants or loans for buying in HUD revitalization areas regardless of your profession.

To find out about programs in your area, contact your state or local housing agency. A local housing counselor may also be able to point you toward such programs, noted Sullivan. (See HUD's list of housing counselors by state.)  Top of page

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