How to Buy a House — Without 20 Percent Down

It was drilled into my head as a kid — if you're going to buy a house, you need to contribute a 20 percent down payment. As an adult, as I pinched pennies and read Dave Ramsey books from cover to cover, I heard similar statements — If you can't put down at least 20 percent on a house, you can't afford it. Even better, pay for your house outright, with cash!

But six months ago, for a variety of reasons, it was time to buy a house — and my husband and I had nowhere near 20 percent for even the most modest dwelling. What we did have saved, we decided, would cover closing costs, moving expenses, and a few pieces of new furniture — a dining table, a recycling bin. Our budget was $120,000 max, and saving up $25,000 would have taken us another several years — time we didn't have.

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Historically, putting down 20 percent on a house has been the gold standard. It obliterates the need for private mortgage insurance (PMI) and gives you credibility with the sellers and the lender, according to Forbes.com.

But research shows that 20 percent is uncommon. As of 2013, most consumers average 16 percent. And in some states the average is even lower, hovering around 12 percent. A 20 percent down payment may be the most financially responsible thing to do, but it may also be an unreachable goal for most Americans.

My husband and I decided to forgo the 20 percent down payment during our house-buying process, much to the chagrin of my parents and, I assume, Dave Ramsey. Here's how we're doing it — and how you can, too.

1. Buy a short sale or foreclosure.
On our house-hunting journey, most of the properties we looked at were short sales or bank-owned foreclosures. Short sales take a notoriously long time to process, so it definitely has its downsides. But they’re oftentimes priced well below market value, and the same goes for foreclosures. If you have time to spare, this could work out favorably.

One property we toured, which had been on the market for months, was listed at just $105,000. According to the comparable properties ("comps") our realtor pulled, that house was likely to appraise for much higher — $125,000 or more. Had we bought it, and had it appraised for that amount, we would have had instant equity of almost 20 percent. That means less time paying PMI and a greater chance we could make a profit when we sell in the future.  

2. Check out federal funding for low-income families.
In many instances, families can't save 20 percent because they simply can't afford to. (A 2005 report from the U.S. Department of Housing and Urban Development showed that low-income families have a rate of home ownership almost 37 percentage points below high-income households.) Families who struggle to make ends meet most likely don't have the means to plunk down tens of thousands of dollars on closing day.  

This is when federal funding programs, like the Down Payment Plus program, can come in handy. Down Payment Plus (DPP) is a program that’s federally funded and state-administered in Illinois and Wisconsin. Federal programs are available in almost every state, and can be located through a quick search on the website for the U.S. Department of Housing and Urban Development (HUD). Programs like DPP, and several others through the HUD Department, provide interest-free loans that are forgivable over a set period of years (buyers who sell the house before a certain date have to pay back the loan). These programs are geared toward families who make only a fraction of the median cost of living in their area.

3. See if you qualify for down payment grants through your state.
In Illinois, where my husband and I live, there is a wealth of funding opportunities for buyers through the Illinois Housing Development Authority. Although there are certain qualifications that buyers need to meet (such as income and purchase price limitations), and although the funding is available only through certain lenders, the state provides homeowners with up to $5,000 in grants. Check with your state's housing department to see if similar funding is available in your area.

4. Check out FHA loans.
Mortgage loans backed by the Federal Housing Association (FHA) have become more popular in recent years. According to Bankrate, 26 percent of buyers opted for an FHA loan over a conventional loan at the end of 2012, up from 10 percent in 2007.

But FHA loans can sometimes add extra hassle for the sellers and the bank. Scrolling through house listings on sites like Realtor.com and Zillow.com, my husband and I noticed several properties with a note in the listing that read, "Cash and conventional offers only." And according to our lender, FHA loans require much more paperwork for everyone involved, including the lenders and the real estate attorney. But with FHA loans, buyers typically only need 3.5 percent of the purchase price.

My husband and I are still searching for the perfect-for-us home — something in our school district that costs under $120,000. It's surprisingly hard to find. But right now we're diving into the search full-force, exploring foreclosures and applying for state-funded grants. We don't know where we'll end up, but we know that down payment alternatives will bring us that much closer to our dream home.

Sarah Watts is a freelance writer and mom based in the Chicago suburbs. Her work has appeared in The Washington Post, Huffington Post, xoJane, Chicago Parent, and others. You can find more of her work at her personal blog, wifeytini.com.

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