You Don’t Need A 20% Down Payment
Housing is on the mend.
Since the start of 2012, home values are up nearly thirty percent nationwide. Unfortunately, rents are rising just as fast. In many U.S. markets, it’s more economical to own a home today than to rent one, which is one of the reasons why first-time home buyers represent 30% of today’s home purchases.
This is higher market share as compared to recent years; a figure buoyed by three key factors.
First, mortgage rates are ultra-low, which has boosted home affordability across the country. Rates continue to troll near 4 percent and remain firmly below last year’s levels.
Second, according to mortgage-software provider Ellie Mae, U.S. lenders are approving more purchase loans than during any period this decade. A few years ago, banks barely approved even half of all purchase loans. Today, they’re approving more than two-thirds.
That’s a huge turnaround.
And, third, there are more low- and no-down payment mortgage programs available to today’s home buyers than during any period in the last 10 years.
No matter how much or how little you want to “put down” on a home, there’s a mortgage program which can help you. Rates are low and it’s easier to get approved.
What follows is a preview of seven popular loans available to today’s first-time and repeat home buyers. Each is commonly available with rates which can be previewed anytime online.
2015’s Low- And No-Down Payment Mortgage Loans
FHA Loan (3.5% Down Payment)
FHA loans allow for a 3.5 percent down payment. Insured by the Federal Housing Administration (FHA), these loans are among the flexible and forgiving for today’s home buyers.
FHA loans are typically best-suited for low-down payment buyers with average or below-average credit scores; and buyers looking at multi-unit homes (e.g.; 2-unit homes, 3-unit homes, and 4-unit homes) as a primary residence.
FHA loans require mortgage insurance premiums (MIP) but, in January 2015, those FHA MIP costs were reduced to help keep FHA loans affordable for buyers using the program.
Noteworthy: FHA loans are assumable, which means that a future buyer of your home can purchase your home with its FHA loan — and its mortgage rate! — still attached. You can actually pass today’s low rates on to tomorrow’s buyer of your home.
Conventional 97 (3% Down Payment)
The Conventional 97 is a special program which was recently reinstated by the Federal Housing Finance Agency (FHFA), which is the parent of both Fannie Mae and Freddie Mac.
The Conventional 97 requires a down payment of just 3 percent and, among other benefits of the program, the Conventional 97 allows a buyer’s down payment to be gifted by a third-party. The only requirement is that the gifter has a blood or marriage relation to the buyer of the home; or is a legal guardian, domestic partner, or finance/fiancee.
The Conventional 97 mortgage is limited to $417,000, regardless of your local mortgage loan limit; and multi-unit homes are not allowed. The program is also restricted to fixed-rate mortgages only.
Noteworthy: The Conventional 97 program is often more costly on a monthly-basis than a comparable FHA mortgage. However, because the program’s mortgage insurance can cancel in as few as 12 months from the date of purchase, its long-term costs are often much less.
USDA Loan (No Down Payment Required)
The USDA loan is guaranteed by the U.S. Department of Agriculture and allows for 100% financing. Formally known as a “Section 502” loan, lenders sometimes call the USDA loan a “Rural Housing Loan”, which is a bit of a misnomer.
USDA loans are available in non-rural areas as well, including within many U.S. suburbs.
The big draw of the USDA loan is that its mortgage rates are often the lowest of all the low- and no- down payment mortgage programs; and its mortgage insurance requirements are quite low, too.
As compared to FHA loans, for example, USDA mortgage insurance costs are half which is why many of today’s buyers will opt for a USDA loan over an FHA one — even if they plan to put 3.5% down. Simply, USDA loans are more economical.
In order to qualify for a USDA loan, the income of a home buyer’s household may not exceed the local media by more than fifteen percent. However, large households are granted certain exclusionary rights.
You can look up this year’s USDA income limits here.
Noteworthy: The USDA loan program is among the few low- and no-down payment mortgage programs which can be used to purchase manufactured homes and modular homes.
VA Loan (No Down Payment Required)
VA loans are loans which are guaranteed by the Department of Veterans Affairs. Generally speaking, VA loans are available to active duty members of the U.S. military; honorably-discharged service members; and many surviving spouses.
Review the complete VA mortgage eligibility guide here.
VA loans are unique among low- and no-down payment mortgage programs because they require no downpayment whatsoever and never require the buyer to make a mortgage insurance payment.
VA loans can be used for homes of any type — single-family, condo, multi-unit, and more — and are assumable by future VA home buyers. Furthermore, the VA loan can be used to finance energy-efficiency improvements to a home.
Noteworthy: Interest rates for a VA loan are typically the lowest of the three “major” loan types — VA, FHA, and conventional. According to Ellie Mae data, VA mortgage rates beat FHA rates by about one-eighth of a percentage point and can be as much as forty basis points (0.40%) lower than a comparable conventional loan.
“Special” Low-Down Payment Loans
Good Neighbor Next Door ($100 Down Payment)
The Good Neighbor Next Door (GNND) program is a special HUD mortgage program which allows home buyers to purchase homes with just $100 down. The program is available to members of law enforcement; firefighters or emergency medical technicians; and, teachers of pre-K through 12th grade.
Buyers in the program also receive a home purchase discount of 50% — yes, 50 percent! — in exchange for agreeing to make the home your sole residence for 36 months, at minimum. Via Good Neighbor Next Door, then, a $100,000 home can be bought for $50,000.
The Good Neighbor Next Door program allows buyers to use FHA, VA, or conventional mortgage financing which helps to ensure low interest rates.
Noteworthy:The Good Neighbor Next Door program allows you up to 180 days to move in to your new home so, if you plan to make repairs prior to Moving Day, there’s no reason whatsoever to have the house work done hastily.
Home Construction Loan (3.5% Down Payment)
Of all the low- and no-down payment mortgage programs available to today’s home buyers, only one can be used for home construction — the FHA 203k loan.
The 203k loan comes in two flavors. The first is the Streamlined 203k, which is used for less-extensive projects and which is limited to $35,000 in total repair costs.
The more common 203k loan is the “standard” 203k, which is used for projects which involve moving walls or replacing plumbing; or doing anything else which would prohibit you from living in the property while the work is being performed. The standard 203k can also be used for landscaping or converting a home with more than 4 units into a 4-unit, owner-occupied home.
Noteworthy: Because the 203k loan is backed by the FHA, home buyers using it remain eligible to use the FHA’s popular refinance program — the FHA Streamline Refinance. The FHA Streamline Refinance is widely-viewed as the simplest, fastest program for refinance an existing mortgage loan.
Piggy-Back Mortgage (10% Down Payment)
The “Piggy-Back” Mortgage is a not really a mortgage at all — it’s two mortgages, one mortgage “piggy-backed” on top of another in order to borrow 90% of a home’s purchase price.
Sometimes called an “80/10/10”, the Piggy-Back Mortgage has the buyer bring a 10% down payment to the closing table and, to avoid having to pay mortgage insurance, two mortgages are issued instead of one. The first mortgage is typically a conventional loan, issued for 80% of the home’s purchase price.
The second mortgage is typically a home equity line of credit (HELOC), issued for 10%.
Piggy-Back Mortgages are often used by home buyers who plan to pay down or reduce the balance on their second mortgage within the first 24 months of homeownership.
Noteworthy: The second mortgage of a Piggy-Back Mortgage is often adjustable and tied to Prime Rate, which is tied to the Fed Funds Rate. When the economy is expanding, the Fed Funds Rate can jump unexpectedly, substantially raising your overall monthly housing payment. Be careful when selecting a mortgage linked to Prime Rate.