Mortgage Options With No (or Low) Down Payments

Most people assume that they need to save a 20% down payment before purchasing a home, but this isn’t true.

While putting less than 20% down generally means you’ll have to pay private mortgage insurance (PMI), this isn’t inherently a bad thing. PMI is simply intended to protect the lender in the case of foreclosure. Yet many buyers continue to save and wait, missing out on the opportunity to gain valuable home equity and take advantage of lower home prices before they rise (as they’re expected to).

Making a 20% down payment may also force you to deplete all of your savings, leaving you what’s referred to as “house poor.” This is considered financially imprudent, since it gives you little (or nothing) to work with in the case of an emergency.

Luckily, a number of mortgage options allow down payments of significantly less than 20%, and some don’t require down payments at all.

No Down Payment Mortgage Options

1. VA Loans

Members of the U.S. military and their families can take advantage of the Veterans Affairs (VA) loan, which offers 100% financing. This is possible because the U.S. Department of Veterans Affairs guarantees the loans, meaning that the agency reimburses lenders for losses due to borrower default.

Benefits of VA Loans

  • No down payment
  • No minimum income requirements
  • No mortgage insurance
  • Lowest mortgage rates of all loan types
  • Lenient credit standards
  • Assistance from the VA if you can’t make a payment
  • Possibility of intermittent occupancy
  • Larger loan sizes in high-cost areas

Who Qualifies for a VA Loan?

You may qualify for a VA loan if any of the following are true for you:

  • Have 90 consecutive days of active service during wartime
  • Have 181 days of active service during peacetime
  • Have six years of service in the Reserves or National Guard
  • Are the spouse of a service member who died in the line of duty due to a service-related disability

Don’t meet these requirements? You may still qualify for a VA loan.

2. USDA Loans

The U.S. Department of Agriculture’s (USDA’s) Rural Development Guaranteed Housing Loan, more commonly referred to as the USDA loan, provides 100% financing for buyers with low to moderate incomes. Like with the VA loan, this is possible because of the USDA’s backing.

While many people assume that this loan is only available to buyers in rural areas, buyers in suburban areas qualify as well. In fact, 97% of U.S. land is in eligible territory.

Benefits of USDA Loans

  • Low mortgage rates
  • Low mortgage insurance premiums
  • Possibility of including eligible home improvements and repairs in the loan size

Current USDA Mortgage Insurance Rates

  • Purchases: 1.00% fee paid upfront at closing (based on loan size)
  • Refinances: 1.00% fee paid upfront at closing (based on loan size)
  • All loans: 0.35% fee paid annually (based on remaining principal balance)

Who Qualifies for a USDA Loan?

Home buyers must meet all of the following requirements in order to be eligible for a USDA Loan:

  • U.S. permanent residency or citizenship
  • Creditworthiness (determined by your length of credit history, credit score, repayment patterns, and credit utilization)
  • Dependable and stable income
  • Ability and willingness to make regular payments on time
  • Adjustable household income that is no greater than 115% of the area median income
  • Guarantee that the property will serve as your primary residence
  • Location within a qualified rural area

Low Down Payment Mortgage Options

1. FHA Loans

Requiring a down payment of just 3.5%, the Federal Housing Administration (FHA) loan is one of the most popular mortgage options among those who don’t want to put a large amount down. In fact, almost one in every five U.S. homebuyers uses an FHA loan to purchase a home.

Benefits of FHA Loans

  • Credit standards are lenient.
  • Applicants with no credit history can prove creditworthiness through alternative means.
  • FHA mortgage rates tend to be lower than comparable conventional rates.
  • Gift funds can make up your entire down payment.
  • Higher debt-to-income ratios are accepted.
  • A variety of FHA loan products are available, including 15-year and 30-year fixed-rate mortgages, adjustable rate mortgages, purchase-and-improvement loans, 203k construction loans, and energy efficiency loans.
  • A subsequent buyer can assume (or inherit) the loan.
  • Higher loan sizes are available in high-cost areas.

Who Qualifies for an FHA Loan?

Homebuyers must meet all of the following requirements in order to be eligible for an FHA Loan:

  • 580+ FICO score (Those with a FICO score between 500 and 579 are still eligible if they can make a 10% down payment.)
  • Maximum debt-to-income ratio of 43% (Some lenders accept 50%.)
    • Student loan payments are taken into account.
  • An appraisal completed by an FHA-approved appraiser
  • Two years since last bankruptcy
  • Three years since last foreclosure
  • Steady employment and ability to prove income
  • Two years of employment history
  • Intention to use the home as a primary residence

2. HomeReady™ Mortgage

The HomeReady™ mortgage is available from almost all U.S. lenders and is backed by Fannie Mae. It is designed to help multigenerational families, minorities, and those with low incomes purchase homes by requiring just 3% down.

Multigenerational families benefit because applicants are allowed to pool the income of everyone living in the home to meet income requirements. Those living in a low-income census tract (an area where the median household income is 20% or more below that of the larger area) or a high-minority census tract (an area where the minority population is 30% or more and the median household income is less than that of the larger area) do not need to meet minimum or maximum income requirements.

However, anyone who meets the other requirements can apply.

Benefits of the HomeReady™ Mortgage

  • Possibility of income pooling to meet income requirements
  • Low mortgage rates
  • Low mortgage insurance premiums
  • Ability to cancel private mortgage insurance after building 20% equity
  • Ability to use gift funds for the down payment
  • Ability to prove creditworthiness through alternative means if you have no credit history
  • A mix of both fixed-rate and adjustable-rate mortgages

Who Qualifies for the HomeReady™ Mortgage?

You likely qualify for a HomeReady™ mortgage if you:

  • Have a credit score of at least 620
  • Live in a qualifying area
  • Do not exceed your area’s median household income (Income restrictions do not apply to those living in low-income and high-minority census tracts.)
  • Don’t own another residential property in the U.S.
  • Agree to complete homeowner counseling online
  • Have a maximum debt-to-income ratio of 50%

3. Conventional 97

The Conventional 97 loan was created to help homebuyers who can’t (or don’t want to) make a large down payment but would otherwise qualify for a conventional loan. Both first-time and repeat buyers can take advantage of the 97% financing, allowing them to make a down payment of just 3%.

Buyers should keep in mind that only 30-year fixed-rate mortgages are available through the Conventional 97 loan, not 15-year fixed-rate mortgages or adjustable-rate mortgages.

Benefits of the Conventional 97 Loan

  • Low mortgage insurance premiums
  • No upfront premium payment
  • No income limit
  • Ability to use gift funds for the down payment
  • Ability to cancel mortgage insurance after building 20% equity

Who Qualifies for the Conventional 97 Loan?

You likely qualify for a Conventional 97 loan if you:

  • Have a credit score of 620 or higher (680 is recommended)
  • Have a debt-to-income ratio of no higher than 43%
  • Have not owned a home within the last three years
  • Need a loan that does not exceed $484,350
  • Intend to use the home as a primary residence
  • Intend to purchase a single-unit home
  • Can prove your income

4. Piggyback Loan

Piggyback loans are so called because they’re actually two different mortgages: one large loan and one second, much smaller loan that “piggybacks” on it. This loan type requires a 10% down payment, allowing buyers to avoid the private mortgage insurance typically associated with loans that accept lower percentages down.

You may have heard piggyback loans referenced using the term “80/80/10” because of their typical structure. The first loan is generally for 80% of the home’s price and the second loan is for 10%. The remaining 10% of the asking price is made up by the down payment.

Generally, the 80% loan is a 30-year fixed-rate mortgage and the 10% loan is a home equity line of credit (HELOC). Although HELOCs tend to have higher rates, they can also be paid off at any time. Many buyers use this structure to get lower rates on the larger loan and pay off the second loan more quickly.

Benefits of the Piggyback Loan

  • No private mortgage insurance
  • Lower monthly payments
  • Ability to pay off the second mortgage anytime
  • Lower out-of-pocket costs than loans that require a 20% down payment
  • Ability to stay below jumbo loan limits
  • Ability to purchase a home that exceeds local mortgage loan limits

Who Qualifies for the Piggyback Loan?

Requirements for piggyback loans vary by lender, but you will typically qualify if you:

  • Borrow no more than $484,350 with the first loan
  • Have a FICO score of 680 or higher
  • Have at least two years of employment history
  • Can prove your income
  • Have three or more months of cash reserves

Not sure which loan type is right for you? Schedule a consultation with us to discuss your options and determine what you qualify for.

[Related: Why Waiting to Save a 20% Down Payment May Not Be the Right Move]

Featured image via Pixabay

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