If not for down payments, many more people would be homeowners. The down payment is a hurdle that deters them from even trying to purchase a home. Even with a reasonable income, it's no easy feat to accumulate 20% of a house's purchase price. The happy news is that you don't have to come up with a sizeable down payment. Several programs offer up to 100% financing. So you may be buying that first home sooner than you think.
What is a No Down Payment Mortgage?
A mortgage that allows first-time purchasers to buy a home without any up-front money, except for the usual closing costs, is a no down payment mortgage. There is no need for a buyer to pay a 20% down payment in the current housing market. It was a fact that became a myth with the first FHA (Federal Housing Administration) loans established in 1934. Only with the conventional loan is a 20% down payment needed to avoid having to pay PMI (private mortgage insurance).
USDA Loans (100% Financing)
Formally known as a Rural Housing Loan, the U.S. Department of Agriculture (USDA) provides no deposit mortgages. This loan is available to potential low to moderate-income buyers who will live in the property located in an eligible area. The focus of the USDA Single Family Housing Guaranteed Loan Program is for rural development and to provide families with opportunities for ownership of safe, sanitary, and decent dwellings. Some features of this loan are:
- You can include the cost of eligible repairs and improvements with the loan amount.
- It is NOT restricted to first-time homeowners.
- The dwelling must be in an eligible rural area.
- Available to people who cannot get a conventional loan without having to pay PMI.
If you don't qualify for this loan, the USDA also has a direct 502 purchase program where they can subsidize your mortgage payments, as long as you don't earn more than 80% of the MHI (median household income).
VA Loans (100% Financing)
The no deposit VA loan is available to members of the U.S military (active duty and honorably discharged) and their spouses. The loan may be obtained from private lenders and guaranteed by the U.S. Department of Veteran Affairs, or it may be a VA direct loan where the VA is the mortgage lender. Loans are available for owner-occupant homes or for homes to be occupied by the eligible spouse or dependent (for active duty service members). Features of this loan are:
- You may borrow to build, buy, or improve a home.
- No down payment is needed as long as the selling price is not above the appraised value.
- No need for PMI or MIP (mortgage insurance premiums)
- Fewer closing costs.
- No penalty if you pay the mortgage off early.
Veteran Affairs also offer Cash-out refinancing loans, Native-American direct loans, and Interest rate reduction refinance loans.
Low Down Payment Required
The following loans require a down payment, but it's significantly smaller than 20% of the purchase price. If you don't qualify for a zero-deposit loan, you may be eligible for one of the following.
The HomeReady Mortgage (3% Down)
The HomeReady Mortgage is backed by Fannie Mae and is available from almost every U.S. based lender. This mortgage offers the home buyer low mortgage rates, reduced mortgage insurance, and inventive underwriting. The income of everyone living in the home is considered when determining qualification and approval for the mortgage. You can also use boarder income or a non-zoned rental unit (even if you're paid in cash) to qualify. This loan is designed to get multi-generational households owning their dwellings by offering mortgage financing with only a 3% down payment. But the program may also be used by anyone in an eligible area who meets the household income requirement. Are you looking for a creative solution to your home-buying situation? We can help you with your mortgage, so you can spend your time finding your dream home. Call Mares Mortgage today!
Conventional Loan 97 (3% Down)
The Conventional 97 loan is available from Fannie Mae and Freddie Mac, asking only a 3% down payment for a home. For some, this is a better offer than an FHA loan. The mortgage deposit may come from gifted funds as long as the giver is a blood relative, a spouse (or fiance/fiancee), or related through legal guardianship or domestic partnership. A few features of this loan are:
- The loan amount cannot exceed $510,400, even if that's the home's appraised value.
- Only a fixed-rate mortgage is available.
- Only single-unit dwellings are eligible.
- This loan may be used to refinance a home loan.
FHA Loans (3.5% Down)
These are not loans from the FHA, but they insure the loans. The FHA produces guidelines for loans it will guarantee, and any lender who issues loans under these standards gets the FHA backing against loss. Well-known for their flexibility regarding credit scores and down payments, the FHA will insure home loans for buyers with low credit scores as long as there is a reasonable explanation. A few features of an FHA insured loan are:
- You only need a 3.5% down payment if your FICO score is 580 or above.
- You'll need a 10% down payment if your FICO score is between 500 and 579.
- This down payment may be entirely from 'gifted' money.
- The purchased home must be your primary residence.
FHA Streamline Refinance Program
One of the notable options under the FHA umbrella is the FHA Streamline Refinance Program. This program is designed to help homeowners with existing FHA loans to refinance their mortgages with minimal paperwork and without the need for an appraisal. The benefits of this program include lower interest rates, reduced monthly payments, and no requirement for an income verification process. It's a straightforward way for homeowners to improve their financial situation by taking advantage of better loan terms.
FHA 203(k) Rehab Loan
For those looking to purchase a fixer-upper, the FHA 203(k) Rehab Loan is an excellent option. This loan allows buyers to include the cost of repairs and renovations into their mortgage. It's a single loan that covers both the acquisition and the rehabilitation of the property, making it easier for buyers to manage their finances and ensure the property is brought up to a livable standard. The FHA 203(k) loan is ideal for buyers who want to invest in a property that needs significant work but have limited funds to cover both the purchase and the repairs separately.
Other Low Down Payment Options
State and Local Programs
Many states, counties, and cities offer down payment assistance programs for first-time homebuyers. These programs often provide grants or low-interest loans to cover the down payment and closing costs. The eligibility criteria and benefits vary by location, but these programs can significantly reduce the financial burden of purchasing a home. Prospective buyers should research local programs and consider them as a viable option to ease the path to homeownership.
Employer-Assisted Housing Programs
Some employers offer housing assistance programs to help their employees buy homes. These programs can include down payment assistance, low-interest loans, or homebuyer education courses. Employer-assisted housing programs are often part of a benefits package and can be a valuable resource for employees looking to purchase their first home. It's worth inquiring with your HR department to see if your employer offers such benefits.
Understanding Mortgage Insurance Requirements
Mortgage insurance is an important factor to consider when purchasing a home, especially if you are unable to make a substantial down payment. Private Mortgage Insurance (PMI) is typically required for conventional loans when the down payment is less than 20% of the home's purchase price. PMI protects the lender in case the borrower defaults on the loan and is usually added to the monthly mortgage payment.
Mortgage Insurance Premium (MIP) applies to FHA loans and serves a similar purpose. It includes an upfront premium paid at closing and an annual premium divided into monthly payments. MIP is required for the life of the loan unless a substantial down payment is made.
Understanding these requirements can help you plan better financially and potentially find ways to minimize these costs. For example, some lenders offer lender-paid mortgage insurance, which might be beneficial depending on your situation.
Tips for Improving Your Mortgage Eligibility
Improving your mortgage eligibility can significantly increase your chances of securing a favorable loan. Here are some practical tips:
- Improve Your Credit Score: Pay your bills on time, reduce outstanding debt, and avoid opening new credit accounts in the months leading up to your mortgage application. Regularly check your credit report for errors and dispute any inaccuracies.
- Save for a Down Payment: While several programs offer low or no down payment options, having some savings can improve your loan terms. Consider setting up a dedicated savings account and automate deposits to build your down payment fund.
- Reduce Debt-to-Income Ratio: Lenders look at your debt-to-income (DTI) ratio to determine your ability to manage monthly payments. Paying down debt can improve your DTI ratio, making you a more attractive borrower.
- Maintain Stable Employment: Lenders prefer borrowers with a stable employment history. Avoid changing jobs or careers right before or during the mortgage application process.
The Role of Credit Scores in Home Buying
Your credit score plays a crucial role in the home buying process. It affects not only your eligibility for a mortgage but also the interest rate you will be offered. Higher credit scores generally result in lower interest rates, which can save you thousands of dollars over the life of the loan.
Different loan types have specific credit score requirements:
- Conventional Loans: Generally need a minimum credit score of 620, although a higher score can increase your likelihood of approval and lead to more favorable terms.
- FHA Loans: Allow for lower credit scores, with a minimum of 580 for a 3.5% down payment and 500 for a 10% down payment.
- VA and USDA Loans: Often have more flexible credit requirements, but a score of 620 or higher is generally preferred.
To improve your credit score, focus on paying off debts, reducing credit card balances, and ensuring all payments are made on time. Regularly monitoring your credit report can help you stay on track and address any issues promptly.
Final Thought: Don't Deplete Your Savings
Any of the above loans can be a life-saver to you and your family. Completely depleting your savings to buy or maintain a home is often called 'house-poor' and isn't an acceptable circumstance. Being house-poor means you look as though you have plenty, but you actually have little or no money set aside for emergencies. The journey of homeownership is full of unexpected expenses - roofs collapse, electrical systems falter, and of course, illness can happen. So savings aren't a luxury; they're a necessity. Scraping your savings account clean to pay a sizeable down payment on a home may seem admirable, but it is unwise - especially since you have options. Do you still have questions? Call Mares Mortgage today!
