It’s a tease. Interest rates are low. Home prices are reasonable. You keep hearing it’s a great time to buy a house. If only the student loans and all your other bills weren’t keeping you from that hefty down payment.

Well fortunately, it’s not as simple as that. It never is. Although most people never even hear of them, there are programs out there that provide for as little as 3% down. There are positives and negatives of each program, but many people are still finding home ownership with requirements for only minimal down payments. Perhaps one of these programs is for you.

Before we discuss the programs, let’s review the basics of Loan to Value (LTV). Traditionally, a borrower provides a 20% down payment when purchasing a home. A $400,000 home would require $80,000, plus various closing costs and escrows which could add up to another $10,000. The loan would be for $320,000, 80%, of the Home Price. This is an 80% Loan to Value or LTV. Banks want to know you have “skin in the game” and won’t walk away from the home if values drop. The more you have invested, the more secure the bank feels and the lower the interest rate they will charge. The less you deposit the more risk they have to absorb and the higher the interest rate. A 40% down payment will get you a better rate than a 20% down payment.

We will now discuss the various programs and the pros and cons of each.

1. CONVENTIONAL MI: Think of this as a regular mortgage that doesn’t need the traditional minimum 20% down payment. Because you are not providing a 20% down payment, you will be charged an extra premium called Mortgage Insurance or MI. This premium will likely range from 0.5% to just under 1%. For example, depending on certain parameters, you may have a base rate of 4.375% and an additional cost of half a point costing a total of 4.875%. This is still a great rate and it enables you to accomplish the purchase. In addition, once the LTV decreases to 80%, you can ask the mortgage company to “drop” the MI and the extra half point will disappear. In our case above your rate will be just 4.375% because the premium of the extra half point has dropped. Now this program does give you a nice degree of flexibility; however, it does require a minimum of 10% for a down payment.

2. FHA: If 10% is still too high for your budget, it might pay to look into the FHA programs which may allow you to purchase your new home with as little as 3.5% down payment. The same $400,000 purchase would require just $14,000 plus closing costs along with an upfront insurance premium and a monthly insurance premium of approximately 1.35% annualized. If the base rate is 4.50%, the payment will be calculated based on a rate of 4.50% plus 1.35%. While in the past, FHA premiums could also “drop off” once the LTV fell to 78%, the law has changed. Presently, premiums on 30 year loans never drop off and 15 year loans need to wait until after year 11, regardless of how low the LTV decreases.

Another benefit of FHA loans is that they provide flexibility on credit scores. With a conventional loan, your interest rate increases as your credit score decreases. With FHA, the rate remains the same regardless of your credit score, as long as the score is high enough to qualify.

3. If you are a veteran, you could be eligible for a 0% down loan. If you are a U.S. veteran, please give me a call.

4. Banks have certain regulatory requirements to lend locally and may offer certain programs to satisfy that requirement. Citibank has the Home Run program which is similar to FHA but has no requirement for MI. The down payment can be as low as 3% and there are no upfront or monthly MI premiums. What’s the catch? You have to qualify. If your income is less than 80% of the county’s mean income (approximately $54,640 in Bergen County) or your home is in a low-to- moderate census tract, you are eligible. Otherwise, you will have to consider the other programs mentioned above.

To recap, if you don’t want to shell out for 20%, but can afford the 10% down payment, you’re probably better off with the conventional MI. The premium is likely about half the cost of the FHA loan, and the ability to drop the premium once you reach 80% LTV is a large advantage over FHA. However, if 10% still feels like a stretch, the FHA’s 3.5% down payment may be your best opportunity to buy a home. Of course, if you qualify for the Home Run program, that will be the best of all the options discussed above.

Below, find a list of the features and benefits of each program.

Pros Cons:

Home Run 3% down. Limitation on eligibility. No MI.

Conventional Lower MI premium, higher down payment: MI can drop off at 80% LTV

FHA 3.5% down, MI will NOT drop off. No adjustments to rate for low scores, higher MI costs

Regardless of the ability to qualify for a loan, it’s important to be confident that you are able to afford the mortgage payments. Don’t take on an obligation before you’re ready. However, after working through the numbers, if you’re ready to buy your first home, and you don’t have enough for a traditional down payment, these programs can help get you started.

By David Siegel