The largest struggle first-time homebuyers often have is coming up with a down payment. Because they don’t have the benefit of equity in an existing home, they have to come up with cold-hard cash. Years ago, it used to be that without 20% down on a home, you couldn’t get a mortgage. Luckily, today that’s not the case.
We’ll show you the top programs that allow you to secure a home with a lot less than 20% down on it.
The FHA Loan
The FHA loan only requires you to put a 3.5% down payment on a home. On a $200,000 home, that means $7,000 down. If you compare that to the standard $40,000 that a 20% down payment would require, it’s quite a deal!
The FHA loan is easier to qualify for in many aspects than the conventional loan as well. You only need a 580 credit score and you can have a debt ratio as high as 31% on the front end and 41% on the back-end.
The one thing you should know about the FHA loan, though, is the need to pay mortgage insurance. In fact, you’ll pay it twice with the FHA loan. The first time is upfront or at the closing unless you wrap it into the loan. The FHA requires borrowers to pay 1.75% of the mortgage amount upfront. This helps fund the FHA’s efforts to guarantee the loans written in their name. The FHA keeps these funds in a reserve account which they then use if a borrower defaults on their loan and the FHA needs to pay the lender back.
In addition to the upfront MIP, you’ll also pay mortgage insurance annually. However, your lender will likely charge you 1/12th of the annual amount each month to make it more affordable. Today, the annual MIP is equal to 0.85% of your loan amount. On a $200,000 loan, you would pay $142 per month for annual mortgage insurance.
The VA Loan
If you are a veteran, you have an even better deal when it comes to getting a mortgage. If you are entitled to a VA loan, you can get a 100% loan, which means no down payment. All you would have to pay is the upfront funding fee of 2.15% of the loan and the closing costs. If there’s room between the home’s purchase price and its value, though, you can even wrap those costs into the loan.
The VA loan is easy to qualify for because it has very relaxed guidelines. All you need is a 620 credit score and a maximum total debt ratio of 43%. As long as you have stable income and can prove you can afford the loan by having enough disposable income at the end of the month, you are on your way to owning a home with a VA loan.
The VA loan does not require annual mortgage insurance. The only fee, as we talked about above, is the 2.15% upfront funding fee. You can choose to pay it in cash at the closing, which on a $200,000 loan would equal $4,300, or you could just wrap it into the loan.
The USDA Loan
The final option that is great for first-time homebuyers is the USDA loan. You don’t have to be a veteran for this loan, but you can get 100% financing. There is a catch, though. You have to buy a home within rural boundaries. This might sound daunting, especially if you don’t want to live in the middle of the cornfields, but that’s not what it means. The USDA bases their rural boundaries on the latest census tract. A rural area according to them has a population of fewer than 10,000 people and is outside of the city limits. That’s it!
The USDA loan requires a 640 credit score; a 29% front-end debt ratio; and a 41% back-end ratio. If you have stable income and employment and don’t have any defaulted federal loans in your recent past, you may be able to secure this type of loan. But, there’s one more catch.
You can actually make too much money and not qualify for the USDA loan. The program is actually for borrowers with low to moderate income. The USDA looks at your entire household’s income when determining your eligibility. For example, if grandma and grandpa live with you and they make money, their income gets counted. The USDA counts the gross monthly income of each adult, but then allows allowances for any of the following:
- $480 for each child under 18 years old
- $480 for each child over 18 years old but in school full time
- $480 for each disabled person living with you
- $400 for each elderly person living with you
After taking into account your allowances, the USDA determines if your income is too high for your area. You can see the limits here. If you qualify, the rest relies on you meeting the above credit score and debt ratio guidelines.
The USDA does charge an upfront funding fee as well as annual mortgage insurance. However, their upfront funding fee is only 1% of the loan amount. So a $200,000 loan costs $2,000 upfront. The annual mortgage insurance is just 0.35% of the loan amount and you pay it monthly, much like the FHA loan. On our $200,000 loan example, it would cost you $58 a month for annual mortgage insurance.
Each of these programs are not just for first-time homebuyers, but they are great programs for people that never owned a home before. With their low down payment requirements and flexible guidelines, they make the perfect first mortgage for many people.