Low down payment mortgage options for home buyers

Below is a list of the current low down payment mortgage options for home buyers. Many of these programs are offered through government sponsored mortgage firms such as Fannie Mae, Freddie Mac, FHA and VA. There are also private lenders that offer special low to no money down payment options that you will discover at the end of this article.

Conventional Loans

Fannie Mae’s Conventional 97 mortgage program features low rates for mortgage insurance and the down payment can come in the form of a “cash gift” from a family member.

These 97% Loan to Value (LTV) mortgages will meet Fannie Mae’s and Freddie Mac’s normal eligibility requirements for their conforming loans, and will require private mortgage insurance (PMI) because the loan to value is greater than 80%. Borrowers who would be eligible for these fixed-rate mortgages must use them for single-family homes that would be their primary residence, and would require full documentation of their income, assets, job status, and have a credit score of at least 620.

program offered by Fannie Mae that only requires 3% of the purchase price – the Conventional 97.

Important details on the Conventional 97 Loan program include:

– It is federally backed only through Fannie Mae.

– Only available for a fixed-rate mortgage, adjustable-rate mortgages are not an option.

– Requires a 3% down payment – based on the lesser of the property’s appraised value or purchase price.

– Minimum credit scores still apply to this loan. Borrower must generally have a score of 640-680. Buyers using gift money for the down payment may be required to have a minimum credit score of 740.

– Does not require an upfront mortgage insurance premium – making financing easier than an FHA loan which requires an upfront premium of 1.75%.

– Loan can only be used for single-family homes, townhomes, condominiums, co-ops, and rowhomes – no multi-unit properties.

– Contains a fixed loan size cap at $417,000, even in places that have conforming mortgage loan limits of up to $625,500.

– Can only be used for primary residences.

– Limited to a combined loan-to-value of 97%.

– Because the program is through Fannie Mae, Fannie Mae’s rules still apply. Private mortgage insurance must be paid until the home reaches 80% loan-to-value (LTV).

– Gifts for the use of the 3% down payment can be given by a domestic partner, fiancé spouse, child, or anyone else related by blood or marriage.

– Maximum debt-to-income (DTI) ratios vary by the down payment source with the Conventional 97 program. Debt-to-income rations cannot exceed 45% DTI. Borrowers using cash gifts as down payments are limited to 41% DTI.

NOTE: Not all lenders offer the Conventional 97 Mortgage program.

Low down Payment FHA Loans

Loans insured by the Federal Housing Administration (FHA) are always a viable option for low-moderate income buyers. The FHA does not originate loans, they simply insure the mortgage to protect the lender against default and losses on their investment. These loans must meet minimum standards set forth by the FHA.

Generally, the FHA requires a 3.5% down payment against the purchase price. For easy numbers, this amounts to $3,500 for every $100,000 borrowed. The lenient FHA guidelines are famous for their liberal approach to both credit scores and minimal down payment requirements.

With any loan that does not meet 80% loan-to-value (i.e. less than 20% down payment), the lender will require a mortgage insurance policy (MIP), or private mortgage insurance (PMI) for conventional financing.

You can read more about FHA loans at this link.

No Down Payment Veterans Affairs (VA) Loans

For current or past Servicemembers and Veterans, loans insured by the U.S. Department of Veteran Affairs (VA) are another viable option. The eligibility requirements are very straight-forward and the loan requires $0 down, opposed to the minimum 3.5% down payment for an FHA loan.

In general, most active duty or honorable discharged Servicemembers can qualify for VA financing. Furthermore, the VA requires no mortgage insurance policy and rates are often in line – or below rates being offered for conventional products.

You can read more about VA loans at this link.

USDA Loans

Another zero money down program is for low-to-moderate income homebuyers that is through the United States Department of Agriculture (USDA), and is known as a Section 502 mortgage or Rural Housing Loan. These loan are not just for rural living, but also for regular less populated suburban neighborhoods as well.

Less Than 1% Down FHA Loan Option (Available Only in CA, AZ, NV and NM)

We have recently teamed up with a lender that only requires a 0.5% down payment for eligible borrowers. This program is one of a kind and you won’t find it by contacting your local mortgage broker or credit union.

The lender will allow a 1st mortgage up to 96.5% of the purchase price, and a “piggy back” junior mortgage that will account for 3%, with the remaining 0.5% provided by you at closing (down payment).

You might be asking yourself, this must come with very high interest rates and fees, right? No. In fact, the APR ranges from 4.250-5.250% for a 30-year fixed, and an interest rate of approximately 8.250% on the junior loan.

Borrowers must always meet a minimum credit score of 580 to qualify for an FHA loan (some lenders may allow as low as 500), have sufficient earnings and plan to occupy the home as a primary residence. The maximum loan amount is $729,750 (depending on local FHA loan limits) and this program is current only available in California, Arizona, Nevada and New Mexico.

Other lenders such as T. D. Bank offer low down payment programs like their Right Step loans which requires a minimum down payment of 5 percent, but does not require a borrower to obtain private mortgage insurance like FHA. To qualify, borrowers need a credit score of 660, and income at or below 80% of the area median income.

If you have any questions about the above mortgage programs or you would like to discuss your current options with a seasoned loan officer, please give me, Erik Sandstrom a call direct at 619-379-8999 or email me at [email protected]