Coming up with funds to close on a home purchase is perhaps the single greatest barrier first time home buyers face. At least there are still too many who believe that. Yet despite the easy access to information and an attempt by mortgage lenders to dispel various myths about buying a home, there seems to be too many who don’t explore buying a home because they don’t have a 20 percent down payment. We’re not sure exactly why this myth still exists. Maybe because potential buyers hear or read somewhere that unless you make a 20 percent down payment, you’ll have to pay mortgage insurance and for some reason they don’t explore any further.
Frankly, there’s nothing wrong with mortgage insurance and it helps lenders make more loans to those wanting to put as little down on a home as possible. But there are options out there that require very little down and in some cases, nothing down. Let’s look at some of the options out there.
FHA Loans
In 1934 Congress established the Federal Housing Administration in an effort to help jump start a weak economy. Back then, down payment requirements could be as high as 50 percent or even higher. Further, loan terms from banks then only lasted for a few years and the borrowers had to refinance into yet another mortgage. The FHA program today requires just a 3.5% down payment while still having some very competitive interest rates and is by far the mortgage of choice for buyers who have never owned a home before.
There are no income limitations for the FHA program but there are limits on how high the FHA loan can be. These maximum loan amounts are determined based upon a calculation using the local median home price for the area. There is a both a monthly mortgage insurance payment as well as a one-time, upfront mortgage insurance premium to help finance the guarantee to lenders. Should the loan ever go into default the lender will be compensated for the loss. FHA loans can be used to buy a primary residence only.
VA Loans
VA loans are hands-down the best choice for someone who qualifies wanting or needing to come to the closing table with as little cash as possible. There is no down payment requirement whatsoever. Plus, the veteran is restricted from paying certain types of closing costs, keeping the overall cost of the loan about as low as you can get. The loan isn’t limited to just military veterans, either. Active duty personnel may qualify with at least 181 days of service. Those who have served six or more years with the National Guard or Armed Forces Reserves also qualify for a VA home loan.
So to do un-remarried surviving spouses of those who have died while serving or died as a result of a service-related injury. The VA home loan benefit can be used more than once so a veteran can use the VA loan to buy a first home, sell it and pay off the existing VA loan and use the benefit to buy yet another, owner-occupied home.
USDA Loans
The last of the three government-backed loans is an offering backed by the United States Department of Agriculture. This program was designed to help those buy and finance homes in rural and semi-rural areas. The USDA loan requires no down payment at all but the property must be located in a USDA approved area.
Surprisingly, these approved areas may even be found in suburban areas as urban creep moves increasingly toward these previously rural areas. There are also income limitations in order to qualify for this special program and the household’s monthly income calculation can be no greater than 115 percent of the local median income for the area where the property is located.
Interest rates for USDA loans are extremely competitive and the guarantee is financed by the guarantee fee which is rolled into the loan amount. Should the loan go into default, the lender is compensated for the loss.
Fannie Mae’s HomeReady Loan
Fannie Mae has gotten back into the low down payment loan program with it’s HomeReady mortgage. The down payment requirement is even lower than the FHA loan at 3.0%. There are income limitations on this program as it’s designed for the low-to-moderate income borrower. There is also a mortgage insurance policy but the premium is reduced for those who qualify.
Interest rates are also competitive and the loans have relaxed credit guidelines. The minimum credit score with this program is 620 and there are even exceptions for those with no credit history. The HomeReady program allows for non-traditional credit sources such as timely utility bill payments.
And unlike other home loan programs, non-traditional income may also be counted to help qualify for the loan. Income from household members living in the property but not appearing on the loan can be used as well as rent from those who are renting one of the rooms in the property being financed.
Down Payment Assistance Programs
There are various government-backed down payment assistance programs created and managed by individual cities, counties and states in either the form of a grant or a loan. For the grant, the funds never have to be repaid and can be used in conjunction with an FHA or conventional loan. With an FHA loan needing a down payment of at least 3.5%, a grant can cover that amount in addition to being used to help defray closing costs.
Other programs are a loan to cover closing costs and a down payment and as long as the borrowers keep the loan and make timely payments for a defined period, usually two to three years, the loan is forgiven. Most down payment assistance programs limit the buyers to be “first timers” and there may be income limitations and home loan counseling as well.
If this is you, or you know someone who wants to buy a home, but are holding back due to a down payment, there are multiple options with some very competitive features. Here at Home Point Financial, we can help you mitigate funds to close and get you in the home you want with as little out of pocket money as possible.
