Whether you’re buying in Orlando, West Hartford or Teaneck, there’s a good chance you might be considering buying with a lower down payment.
The standard down payment that enables you to avoid additional cost for a home is 20%, however, there are many programs that allow a lower down payment, with some loan options requiring an additional monthly charge called mortgage insurance (MI). Let’s review several low-down-payment loan programs in more detail to see what may work best for you.
FHA—Many people use the FHA loan option because it allows a lower required credit score, and down payment options start at only 3.5%. It does require MI, and the process can be a little more complicated than a typical mortgage application.
VA—Veterans are eligible for VA loans, which allow for 100% financing with no MI. VA loans can be more complicated, but are certainly worth exploring if you are eligible. It’s important to use an experienced loan officer who is familiar with the VA program because the loan process is different from the standard mortgage programs.
Fannie Mae HomeReady® or Freddie Mac Home Possible®—These Fannie Mae and Freddie Mac programs respectively allow for as little as 3% down payment options and require MI. These loan programs do have income limitation requirements. Generally, if the borrower’s income is too high, they are not eligible for this program.
Fannie Mae and Freddie Mac Conforming and Conventional Programs—In addition to the programs mentioned above, options are available that allow eligible customers to borrow as much as 95% loan to value (LTV) under conforming guidelines and without the income limitations. MI is required, but the amount will typically be less as the down payment increases. People who are not eligible for the other special programs mentioned in this article typically choose between FHA and these conforming programs. One advantage of these programs over FHA is that once the LTV reaches a certain level, the MI can be waived. There are other guidelines when using FHA that could complicate a mortgage application, potentially causing a seller to prefer a non-FHA purchaser.
Other High Loan-to-Value (LTV) Programs—Some banks have special programs for certain borrowers, such as physicians, but are very lender-specific. Some of these programs allow for higher LTV and charge MI, while others do not charge MI.
Underserved Markets—Banks typically have a requirement to lend in their branch footprint. There are special programs designed to expand homeownership opportunities for more borrowers to satisfy the banks’ obligations under the Community Reinvestment Act (CRA). These programs allow for as little as 3% LTV options.
Down Payment Assistance Programs (DPAP)—These are programs typically administered by local or state government agencies whereby a forgivable loan is made to the borrower and a second lien is placed on the home. In some cases, the loan is forgiven if the borrower still owns the home after a certain period of time, often between five to 10 years. If the buyer sells the home before the term period is up, a prorated portion of the down payment assistance is repaid.
If you are beginning to search for a home, it’s imperative to have a strong preapproval. There are several types of preapprovals, but the preferred is an underwritten and approved preapproval. This type of preapproval still comes with contingencies, including appraisal, sales contract, insurance, etc. You should talk to your loan officer about what type of information you will need to provide when applying. This type of preapproval will tell the seller that you are a strong buyer, providing the confidence to move forward with the homebuying process.
The above information is intended to be a summary of some of the low-down-payment programs available to buyers who may have limited funds but who wish to proceed with the purchase. The list is not exhaustive or complete. Some are available through Guaranteed Rate Affinity, some are available through our Broker channel and others are not available at all through GRA.
If you’d like further information, please reach out to me directly at [email protected] or (201) 356-4393 and I’d be happy to discuss in more detail how I can help or where you can go to get further assistance.
**Guaranteed Rate Affinity, LLC is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of House and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
**Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate Affinity for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate Affinity, LLC does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate Affinity, LLC. Guaranteed Rate Affinity, LLC its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
By David Siegel