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Get the Low Down on Low Down Payment Options

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When you make the decision to purchase a new home, there is a lot you have to plan for.  One of the most important and usually largest expenses, is the home down payment. With traditional financing, you may often be expected to pay up to 20% down as well as closing costs.

No and Low Down Payment Options

FHA Loans

FHA is a loan issued by the Federal Housing Administration.  FHA loans require little to no money for a down payment and they are available to homebuyers who may have less than desirable credit.  In FHA loans you can also add additional funds for home repairs needed and may even be able to not pay costs at closing.  You will be required to pay a mortgage insurance premium to cover the lenders risk of payment default.  This involves a two-fold system, which includes an annual premium as well as monthly payment premiums.

 

Conventional 97 Loans

A Conventional 97 loan is a loan backed by Freddie Mac and Fannie Mae that is exactly as it sounds.  The loan will cover 97% of the value of the home and the down payment required is 3%.  A conventional 97 loan can be cheaper than an FHA loan as there is no annual mortgage premium and the monthly mortgage premiums per month are lower.  Conventional 97 loans require a good credit score and are available in both 15 year and 30 year fixed terms.

 

Homeready™ Mortgage

This type of mortgage provided by Fannie Mae, is a more flexible and affordable option for many homebuyers.  These loans allow borrowing up to 97% of the value of the home with a low down payment.  This type of loan offers a lot of flexibility in the underwriting process.  They will allow nontraditional incomes and are created for low to moderate income buyers who are creditworthy.  

 

Conventional Loans with PMI (Private Mortgage Insurance)

Even if you have a small amount saved for a down payment, you may still qualify for a conventional loan.  If you have good credit, income, and debt to income ratio, but not 20% for the down payment, you will most likely qualify for a conventional loan.  The lender will require monthly PMI premiums to offset their risks in the event that you default on your loan.  

 

VA Loans

VA loans offer low down payment options for veterans who are looking to purchase a home.  VA loans offer low interest rates as well as flexible underwriting requirements for both active and retired military personnel.  There is a VA fee associated with these loans that goes to help the continued funding of the program.  This fee is waived for military personnel that has been disabled.

 

Rural Development Loans

A USDA home loan is a zero down payment mortgage for eligible rural and suburban homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.

 

What can You Expect with a Low Down Payment Mortgage?

When you don’t have the traditional 20% down, a low down payment mortgage option may work for you.  When choosing one of the loans above it is important to consider a few things.

 

Mortgage Insurance

When utilizing a low or down payment mortgage option, you will often be required to pay mortgage insurance as a protection for the lenders.  Typically when home owners default on a loan, the financial institution will recoup the cost that has been lent by selling the house.  These type of sales are often done quickly to avoid unnecessary costs.  If there has been little money put down on the house, there will be little equity at the beginning of the loan and if the housing market were to drop the lender might be unable to recoup their loss. 

 

You Will Have Little Equity at the Beginning

Often times closing costs and other fess can be rolled into a mortgage, therefore choosing one of the low down payment options above may leave you with little in terms of equity at the beginning of the mortgage.  This can hinder your chances of getting home equity or line of credit loans that you may want to use to remodel or upgrade your home until farther into your mortgage.

 

 Your Monthly Payments Will be Higher

While much of your monthly payment is dependent on the interest rate you will secure, the total owing on the loan is also a major part of it.  With less down, you will have a larger loan that has to be repaid over the term and this will result in higher principal payments and more interest over time.

If saving for a down payment has hindered your dreams of home ownership, try one of the low down payment options above to help make your dreams a reality. For more information on Everything You Need to Know About the Mortgage Process (And Then Some) head to our page and get answers to all your questions. 

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