Do you think you cannot purchase a home unless you have a 20% down payment? While this used to be the way of the mortgage industry, it is not anymore. There are several programs you can use to purchase a home. A few don’t require any money down at all! Of course, it is to your benefit to make a down payment because it helps you own the home faster, but it’s not always possible. Here we discuss the five most common mortgage loans that allow you to put down less than 20%.
The most common low down payment loan is the FHA loan. With just 3.5% down it quickly became a first-time homebuyer’s best friend. On a $150,000 home, you only need $5,250. If you needed 20%, you would need $30,000 – that is quite a difference!
FHA loans are backed by the government, but not funded. The guarantee the FHA offers lenders enables lenders to follow the more flexible guidelines the FHA loans offers. Today, they are known as the perfect loan for those with less than perfect credit. Given the state of our economy over the last 10 years, many more borrowers have turned to this loan. It is not just for first-time homebuyers. Anyone can use this loan.
The guidelines are simple. A minimum credit score of 580, debt ratios around 29/41, and mostly on-time payments over the last year. You only have to wait 3 years after a foreclosure and 2 years after a Chapter 7 bankruptcy to apply for the FHA loan. They are very liberal with their guidelines and often allow exceptions to the rules with compensating factors.
FHA loans require the payment of upfront mortgage insurance as well as annual mortgage insurance. Right now, upfront MI equals 1.75% of the loan amount and the annual mortgage insurance equals 0.85% of the outstanding principal balance. You pay the annual mortgage insurance for the life of the loan on a monthly basis.
If you are a veteran of the military or work in the reserves, you may be eligible for a VA loan. Veterans who served at least 90 days in the war or 181 days during non-war periods may be eligible.This loan allows veterans to purchase a home without any down payment. This loan also has the government guarantee. If a veteran defaults on the loan, the VA pays the lender.
VA loans have even simpler guidelines than FHA loans. The VA does not focus on credit score or debt ratios. Instead, they focus on the amount of disposable income you have after you pay your monthly bills. They have a minimum amount each family must have based on the area they live and the size of the family. For example, a family of 4 needs the following residual income:
- Northeast $1,025
- Midwest $1,003
- South $1,003
- West $1,117
The VA sticks to these guidelines fairly closely. Credit scores and debt ratios are often provided exceptions, though. Most lenders have their own minimum requirements though, since they are the ones funding the loan.
The VA loan has another advantage over the FHA loan – they do not require annual mortgage insurance. You pay an upfront funding fee at the time of closing and that is it. However, the upfront fee equals 2.15% of the loan amount. Some lenders allow you to wrap this cost into the loan.
Many people mistakenly think USDA loans are only for homes out in the middle of nowhere. In fact, you can secure this loan type just outside of the city limits in many areas. The USDA focuses on population – areas with fewer than 20,000 residents often count as a rural area. This is good news because the USDA loan also does not require a down payment.
In order to qualify for USDA funding, though, you must not exceed 115% of the area’s average income. The income the USDA uses to determine your eligibility is the total household income. Any adult living in your home that makes money must include their income. However, the USDA does allow some allowances on this total. Every child living with you whether under 18 or over 18 and a full-time student allows a $480 deduction. You also get a $480 deduction for disabled residents and $400 for any elderly people living with you.
If you are eligible for the USDA loan, you can enjoy their simple guidelines including:
- Minimum 640 credit score
- 29/41 debt ratios
- Low guarantee fees
USDA loans also have an upfront and annual fee; however, they are low compared to any other program. Right now, USDA loans require 1.0% of the loan amount upfront and 0.35% of the outstanding loan amount on an annual basis.
Believe it or not, you can get a conventional loan with as little as 3% down. Of course, just like any other conventional loan, you must have good credit and low debt ratios to qualify. Generally speaking, you may qualify with a score as low as 620, but these instances are rare. Even if you did qualify, the interest rate and Private Mortgage Insurance would likely hike your debt ratio up too high. If you have a credit score of 680 or higher, this may be a good option for you.
Just like any other conventional loan, you need debt ratios around 28/36 and a solid credit history. The caveat to this loan, however, is you must be a first-time homebuyer. Don’t let this deter you though, if you already owned a home. If you are not currently a homeowner and it has been more than 3 years since you owned a home, Fannie Mae considers you a first-time homebuyer again. This gives you access to this lucrative first-time homebuyer’s program.
Conventional Loans with a Low Down Payment and PMI
Even if you are not a first-time homebuyer, you can use conventional financing and put less than 20% down. The minimum for most conventional programs is 5%. This is still quite a savings over the 20%. The same guidelines apply as above with the exception of needing to be a first-time homebuyer. Keep in mind, with conventional financing, you must pay Private Mortgage Insurance. The exact amount you pay varies as it is based on your credit score and LTV. The good news, however, is once you owe less than 80% of the value of the home, you can drop the PMI and keep the same loan.
These five loans offer the chance to purchase a home with much less than a 20% down payment. You do not need perfect credit for any of the programs. However, each program does have specific requirements, such as being a first-time homebuyer or being a veteran. Make sure to shop around with different lenders to figure out which program is the right one for you!