Buying a house is a major decision. It might be the biggest financial decision you’ll ever make. However, I’m often suprised when people tell me they’ve just assumed they cannot afford to buy a house due to not having a ton of cash saved up. If you’ve been on the fence about buying a home because you fear you’ll need a hefty down payment, read on. You might discover buying is more within your reach than you’d originally thought.
But aren’t big down payments required?
Nope, not necessarily. One of the major factors keeping many from buying is the (often incorrect) mindset that it’s simply not financially attainable. The average down payment for first time home buyers, according to the National Association of Realtor’s Profile of Home Buyers and Sellers, is only 6%. Yet, when polled, 87% of people think at least a 10% down payment is needed. But did you know there are loans that require a down payment even less than that? Some even require ZERO down payment. Let’s talk about 5 of the major options in 2019.
FHA Loans
The Federal Housing Administration (FHA), which was created to make home ownership more attainable to the average American after the Great Depression, only requires a 3.5% down payment. FHA loans are guaranteed (insured) by the federal government and are a very popular option because federal backing allows lenders more flexibility in the challenging and often frustrating underwriting process. These loans require not only lower down payments but also a less stringent (580) credit requirement. Many people who assume they can’t afford the down payment on a house might actually be within easy reach of home ownership because of the FHA option.
USDA Home Loans
Maybe you feel like you’re ready to be a homeowner but would prefer not to put anything down at all. If that’s the case, the U.S. Department of Agriculture has the USDA Rural Development Guaranteed Housing Loan Progam that requires zero down payment. These loans are available to eligible to persons buying houses in rural or suburban communities. Besides requiring no down payment, the interest rates are low, as well. Like FHA loans, participating local lenders issue these loans and the USDA guarantees the mortgages. Also like FHA loans, Rural Development (RD) loans will require buyers to pay a mortgage insurance premium. The USDA also issues loans directly (not through a lending institution) for low and very low income applicants. The interest rates on these loans can be as low as 1% after subsidies are factored in. To qualify for one of these loans, income limits apply and are different according to where you live and the size of your household. To find out more about RD loans, and to determine eligibility, follow this link:
https://www.rd.usda.gov/la
VA Loans
Guaranteed by the U.S. Department of Veteran Affairs, VA loans are available to active duty and honorably discharged service personnel, spouses of service members killed in the line of duty, and men and women who spent 6 or more years in the Reserves or National Guard. VA loans require zero down payment and no mortgage insurance. They also allow for loan sizes of up to $726,525 in high-cost areas.
HomeReady Loan
This loan is different from the previous 3 in that it is a conventional loan; meaning it is not government insured. The goal of the Fannie Mae HomeReady loan program is “to put low- to moderate- income borrowers with good credit in homes for as little as 3% down.” According to Fannie Mae, the ideal HomeReady borrower-
- has low-to-moderate income
- is either a first time or repeat home-buyer
- has limited cash for a down payment
- has credit score greater than or equal to 680
- has supplemental boarder or rental income
- is looking for low-cost refinancing option
Unlike FHA and USDA loans, the HomeReady loan has mortgage insurace that is cancellable once the borrower’s equity in the home reaches 20%.
Conventional Loan 97
While at least 5% down was once a standard requirement by Fannie Mae and Freddie Mac, borrowers can now acquire a conventional loan with as little as 3% down. While FHA loans can be a great option, it’s nice to have an alternative with lower upfront fees and non-permanent mortgage insurance. Here are the guidelines to qualify for this loan:
- debt-to-income of 41% or lower
- $424,100 maximum loan limit
- minimum credit score of 620
- one of the borrowers can not have owned a home within the past 36 months
- owner-occupied buyers only (you can’t buy it to flip or rent out)
- can be single family, PUD, condo, town homes and CO-OP
- maximum loan-to-value ratio of 97%
For the Conventional 97, a friend or family can gift the cost of the down payment, which is not allowable under certain other loans.
So, there you have it. These loan programs are current and some are relatively new and gaining popularity. It’s easy to see why. Gone are the days of parting with every penny you have saved for your down payment. I hope you’ve found this article enlightening. Questions about any of these programs? We’d be happy to assist. We want to make home ownership a reality for as many people as possible!
*all information contained in this article is deemed reliable but not guaranteed.
The Larter Team 