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Buying a house is a massive financial investment. So what happens when you have to buy your next one?
Most of the time, you need a down payment to get a mortgage to buy a home. If you’re buying a second home, you might even need a larger down payment than your first one. But if you haven’t sold your home yet and you haven’t built up a large savings account in the time since you last paid a down payment, what are you supposed to do? If you’re looking to buy your next home before you sell your current one, or want to buy a second home, can you do it without a down payment?
Whether you have to relocate for a job or you’d like to buy a mountain retreat for vacations, you can do it without furnishing another down payment. But you might need a little help. In this piece, we’ll explore your options for buying your next home without a second down payment — or at least a significantly smaller one than your first.
Can you afford a second home?
Before you start shopping for your next home, however, it’s important to know if you can afford it. If you plan to sell your first home, can you afford to buy your next home before selling your first? Can you afford two mortgage payments? Remember, in addition to an extra mortgage payment, you may also have to consider costs like:
- Homeowners insurance
- HOA fees
- Private mortgage insurance
- Property taxes
- Utility bills
Before searching for a second home, you should also consider whether or not you can afford maintenance and other costs for your primary home while it’s on the market. Also, if your second home won’t be a primary residence, also consider the costs of a home manager and other maintenance you can’t do yourself.
Find a property you’re interested in, estimate what the monthly payments would be if you didn’t put any money down versus if you did put money down, and calculate your estimated expenses. If you do the math and find you can afford to carry two homes, you’ll have an easier time getting another mortgage, which will make it easier to move without selling your first home.
If you can’t afford to put any money down but still need to move on a timeline, there are some options.
Finding home loans without a down payment
The easiest way to buy a home without a down payment is to make an all-cash offer. However, the vast majority of people cannot afford to do that without closing on their current home. That puts you in a dicey position of having to rush to find and close on a new home.
It is possible to buy a second home with no money down, but will probably come with stricter lender requirements. To minimize risk, most lenders require a 20% down payment for a second home mortgage. If you’re looking for a new primary home, you’ll have more flexibility on that percentage.
Otherwise, there are a number of options to pursue.
While you can’t use a government-backed loan for a second home, these loans may come in handy if you’re moving from one primary residence to another. Most government-backed loans offer no or low down payment options, depending on how you qualify.
FHA loans are backed by the Federal Housing Administration and typically require a down payment. However, if you’re buying a second home or your next primary home, there’s more flexibility to work with lenders to secure a lower down payment.
Since they’re offered by most lenders, FHA loans are subject to the standard lender due diligence. An FHA-approved appraiser will have to appraise the home you want to buy and you’ll have to get it inspected, too. If you have a credit score of 580 or better, FHA loans require only a 3.5% minimum down payment. If your credit score is below that, you’ll have to come up with a 10% minimum down payment.
Also, if you don’t put 10% or more down, you’ll have to pay a mortgage insurance premium (MIP) for the life of the loan, making this option less than ideal.
If you plan to buy a property in a USDA-eligible area (typically rural or underdeveloped) and you meet certain eligibility requirements, you can get a USDA loan with no down payment. To qualify for a USDA loan, you must:
- Be a US resident, noncitizen national, or qualified alien.
- Have an adjusted gross income of no more than 115% of the median income in the area.
- Show you have a stable income and can make mortgage payments.
- Have a DTI (debt-to-income ratio) of less than 50%.
- Have a credit score of 640 or better.
VA loans are for veterans and active service members of the U.S. Armed Forces, and they require no down payment. In order to qualify for a VA loan, you must meet at least one of the following criteria:
- Served 181 days of active service during peacetime or 90 consecutive days of active service during wartime.
- Served more than 6 years with the National Guard or Reserves.
- You’re the spouse of a service member who lost their life in the line of duty or the spouse of a service member with a service-related disability.
- You have a Certificate of Eligibility (COE).
Note that service time requirements don’t apply if you’ve been discharged due to a service-related disability.
In some cases, a buyer can take over a seller’s FHA or VA mortgage. Assuming a mortgage allows you to bypass making a down payment. If rates have risen since the seller bought the home, buyers can assume the mortgage at the seller’s lower interest rate and avoid the upfront costs. It’s an obvious win for buyers but there’s not as much to gain for sellers unless they’re falling behind on the payments and need to downsize.
Home equity financing
Using a home equity line of credit (HELOC) or a home equity loan lets you borrow money against the existing equity in your home. This is a good way to come up with some cash to cover a down payment on your next home. However, keep in mind that tax laws implemented in 2018 say you can’t write off the interest paid through a home equity loan or HELOC unless it’s used on the home you borrowed from. So, if you’re using that equity to buy a new home, you won't be able to write off the interest.
When you take out a new loan to replace your old one, it’s called a cash-out refinance. This process cashes out the equity you’ve gained in your home and allows you to refinance your mortgage with new terms like a lower interest rate or longer repayment terms. A cash-out refinance allows you to borrow up to 80-85% of your home’s value while also lowering your interest rate. That’s some instant cash for your next down payment.
Not only will you get some cash, but you’ll also lower your monthly payments, allowing you to use the savings to help fund a new down payment.
If you’re over the age of 62, you can use the proceeds from a reverse mortgage to pay the down payment on a second home. In reverse mortgages, owners must stay in the home as their primary residence — which really means you just have to spend more than half of your time there.
Buying your second home with Orchard
Buying your next — or second — home while still living in your first is a problem many homeowners face. Orchard specializes in helping homeowners do just that.
If you’re struggling to come up with a down payment, Orchard can help unlock up to 90% of your home value before you even list. Then, Orchard can help you make the best possible offer on your next home without rushing to sell your current one. In a hot market, Orchard can even turn your offer into all-cash. That way, you can focus on moving and enjoying your new home while Orchard handles listing and showing your old one.
Orchard recommends and manages updates that will help your home sell faster and for the best price possible. You won’t even start paying a mortgage on your new home or pay Orchard until the old one sells.
Buying another home without a down payment is difficult for anybody without a massive savings account. There are options for no or low down payment loans and strategies you can take to find cash for your next down payment, but, we have to say, Orchard makes the entire process seamless.