These five solutions can get you in a home when a 20% down payment is too much.
When buying a home, it can be difficult to scrounge up enough money for the traditional 20% down payment, but that doesn’t have to stop you from purchasing your dream home. There are several types of loans available that may allow you to purchase a home for as low as 3% down. We’ll discuss five such options below and what it takes to qualify for each. In all of these cases, shop around for a lender to find the best rate and monthly payment for your specific situation.
Plus, you may be able to get a home buyer rebate to help put some money back in your pocket after the sale goes through. With the home buyer rebate, a real estate buyer’s agent is willing to give back a portion of their commission fee to you, their client. If you hire an agent, it’s definitely worth asking if they’re open to a home buyer rebate program to save even more at closing.
U.S. Department of Agriculture (USDA) loans are designed to help low to moderate-income families in rural areas be able to purchase a home. Rural areas are defined as open country, but the definition is broad enough that many suburbs apply. The idea is to simultaneously help people afford a home who wouldn’t be able to otherwise, while helping rural communities (especially those who rely on agriculture) to retain or attract workers.
Along with purchasing a home in a designated area, you must also have U.S. citizenship or be a permanent resident, have a credit score of at least 640, show stable and dependable income and an ability to repay the mortgage, have an adjusted household income less than 115% of the area median income, and use the property as your primary residence (not as a rental or income producer). Those with a credit score below 640 may still be eligible but have to meet stricter guidelines.
USDA loans have some of the lowest interest rates on the market, but will differ depending on your credit profile. Similar to other mortgage options, the better your credit score, the better your interest rate. You’ll apply for a USDA loan through an approved bank or credit union and the lender will set its own interest rate. After you’ve found a qualified home, your lender will underwrite the loan file to ensure it meets all USDA requirements and then the USDA will underwrite it. Because of this double approval process, USDA loans may take longer than others to gain approval.
VA Home Loans
Veterans Affairs (VA) loans help those who have served, or their spouses or dependants purchase a home. To be eligible, you must purchase a home as your primary residence, have satisfactory credit, and enough income to meet the monthly payment. Your length of service, your status and your character of service may also come into play.
Similar to USDA loans, you apply for a VA loan through a bank or other private lender after securing a Certificate of Eligibility (COE) through the VA. The VA backs the loan so there’s less risk to the lender, meaning you can secure the loan for better terms and usually without a down payment. As with other government-backed loans, the underwriting process can take a bit longer and be more in depth so be prepared for a potential delay in closing.
You can secure a HomeReady mortgage with a down payment as low as 3%. Borrowers should have a credit score of at least 620 (but at least 680 for best pricing). Unlike other types of low down payment loans, a HomeReady loan allows for flexible financing in its underwriting – you can include renter and boarder income, gifts, grants, or contributions from non-occupant borrowers like parents in your funding of a down payment.
Be aware that with a HomeReady mortgage, you’ll need to pay for mortgage insurance if you pay less than 10% in a down payment. This is an additional monthly premium you pay that protects the lender if you default on your loan. Unlike an FHA loan discussed below, once your equity reaches 20% you may be able to cancel it.
A Federal Housing Association (FHA) loan is another type of government-backed mortgage. While it’s incredibly popular with first-time homebuyers, it’s not exclusive to them. FHA loans require lower minimum credit score and down payments than traditional mortgages – you can get one for 10% down with a FICO score of 500 to 579 or just 3.5% down if you have a score higher than 580. But, you must show two years of employment, and be below certain debt ratio requirements.
The downside of an FHA loan is that since it is a government-backed loan, the property you’re looking to purchase may be more heavily scrutinized than if you were to opt for a conventional loan. As a result, you (or your agent) may have to negotiate more repairs with the seller in order for the home to qualify for an FHA loan. Thus, it may slow down your purchasing process.
Additionally, you’ll need to purchase FHA mortgage insurance. This coverage protects the lender from a loss if you default on the loan – you’ll pay an upfront mortgage insurance premium in the amount of 1.5% when you close on the home and another annual mortgage insurance premium ranging of about 1%. While most mortgage insurance can be canceled after reaching a certain amount of equity in the home, FHA mortgage insurance must be paid for the entire life of the loan, which can really add up over the 15 or 30-year life of your loan.
Home Possible Mortgage
The Freddie Mac Home Possible mortgage allows you to purchase a home for as little as 3% down and you can qualify if you have a credit score of at least 660. Your income must also not exceed 80% of the area median income (AMI) to ensure that the loan is going toward its intended very low- to moderate-income borrowers. While you must pay mortgage insurance until you reach at least 20% equity, you can cancel it after this time.
Another benefit to a Home Possible loan is that your down payment can come from a variety of sources. This may include family, employer-assistance programs, or secondary financing. Plus, the loan can be used to purchase 1-4 unit properties, condos and planned-unit developments (PUDs) and some manufactured homes may also be eligible with certain restrictions.
Published by Debt.com, LLC