The housing market is always changing, and recent trends are showing that housing prices are continuing to rise. If you’re looking around for a new home and the prices you’re seeing are leaving you disgruntled, it’s okay! There are many mortgage options available that don’t require a 20% down payment. Some options ask for 5% or less down! This post will go over some low down payment mortgage options that you should consider for your next home purchase.
Government Low Down Payment Options
The first low down payment option is an FHA loan because approved borrowers can have a down payment for as little as 3.5%. You don’t have to be a first-time homebuyer to qualify for this loan and you can refinance or purchase a primary residence for a loan amount that can exceed $900,000 in high-end areas. A big negative about this loan is the mortgage insurance premiums. Less than a 10% down payment requires MI insurance for the entirety of the loan, and it continues if you don’t sell your home, pay the full balance, or refinance into a conventional loan.
Another option is the USDA loan which can allow you to get loans of up to 100% of your purchase price. USDA loans are for low-to-moderate income borrowers that are looking for property in rural areas, and they are backed by the Department of Agriculture. You have to meet certain requirements to qualify for this loan, so check your eligibility before applying. Premiums for this loan are usually 1% of the loan upfront and added to your loan balance. There is also an annual premium of 0.35% of the loan balance, but as you pay off the loan, this annual premium reduces.
A third option is the VA loan that is available for veterans, active service men and women, and reservists. Service members can be eligible through the Department of Veteran Affairs to receive up to 100% financing with no monthly MI premiums. A one-time funding fee is collected when the loan closes based on the veteran’s down payment and eligibility, and it varies from 1.25% to 3.3%.
Conventional, Non-Government Insured Loans
When a mortgage lender closes on a conventional loan, they sell the loan to government-sponsored enterprises. The two enterprises are Fannie Mae and Freddie Mac, and they purchase loans with as little as 3% down payments. The catch is they need to have private mortgage insurance (PMI).
Fannie Mae has the Home Ready mortgage. This mortgage requires the borrower to take a homeownership education course before closing, and it can apply to borrowers with income of up to 100% of their specific area median income.
Freddie Mac has the Home Possible mortgage that is similar to the Home Ready Mortgage. A borrower has to take a homeownership education course before closing and it allows a minimum down payment of 3%. It has flexible guidelines and can even use the rent from a roommate or rental income from another unit to help a potential borrower qualify for the loan.
If the equity in a home is less than 20%, both Fannie Mae and Freddie Mac require PMI. Actual premium costs vary depending on loan-to-value, but they are lower than FHA premiums. You can also cancel your mortgage insurance if your loan-to-value drops below 78%, and you won’t need to refinance, sell or pay off your mortgage. Some people would consider this a huge benefit compared to government mortgage insurance.
