Low Down Payment Mortgages
For many interested in becoming homeowners, gathering a down payment can be the most daunting obstacle along the way. While a large down payment will bring down your monthly mortgage payment and start you with a fair amount of equity in your home, the traditional 20% of price is not always feasible for everyone. And it’s not the only route to becoming a homeowner. In fact, there are many options for mortgages with as low as 3% down payments or no down payment at all.
Zero Down Payment
Navy Federal Loans
Membership to the Navy Federal Credit Union is open to members of the military, some civilian employees of the military and U.S. Department of Defense, and family. Qualified members can receive up to 100% financing of their home purchases, meaning $0 down. Though, in many cases you would have to pay a 1.75% funding fee, sometimes referred to as mortgage insurance. If you’re a qualified member, mortgages via the Navy Federal can also be a good option if you have a less than stellar credit score.
VA Loans
The Department of Veterans Affairs does not actually offer loans directly to buyers. They do however guarantee mortgages with zero down payment if you are a qualified service member, veteran or eligible spouse. Like loans from Navy Federal, buyers will pay a funding fee to protect lenders and the VA from the possibility of defaulting on the mortgage. Depending on the loan amount and the individual buyer’s qualifications, the funding fee can vary between 1.25-3.3%. As the VA does not provide the actual loan, there is no official credit score minimums, but typically VA approved lenders look for scores 620 or higher.
USDA Loans
The United States Department of Agriculture offers a mortgage guarantee program aimed at rural and suburban first time home buyers. Due to the program’s popularity, it often runs out of money before the end of the fiscal year. To be eligible for the program, buyers must be looking to purchase within certain areas and must meet guidelines for household income. With USDA loans, you will pay a upfront funding fee, typically 1% of the loan, and an annual .35% fee for the life of the loan. Similarly to a VA guaranteed loan, USDA loans have no official credit score minimums, but typically lenders will look for scores of 640 or higher.
Low Down Payment & Poor Credit Scores
FHA Loans
While the above programs can offer loans with low or zero down payments to those with poor credit scores, not everyone meets their eligibility requirements (or not every home does, in the case of USDA loans.) The Federal Housing Administration’s loan guarantee program can be used regardless of military status or home location. And it can be a good option if you don’t have much money available for a down payment and don’t have a great credit record. FHA loans are available with as little as 3.5% down for those with a credit score of 580 or above, and 10% down for credit scores of 500-579. Another consideration is that with an FHA loan, you will have to pay mortgage insurance premium, possibly for the life of the loan.
Low Down Payment & Good Credit Scores
Conventional Mortgage with PMI
If you don’t have much money for a down payment, but have a credit rating in good standing, it may be worth considering a conventional mortgage. Conventional mortgage loans are typically associated with 20% down payments, but this is not always the case. Buying a home with a low down payment will mean higher monthly mortgage payments. It will also mean having to purchase private mortgage insurance, or PMI. While this is similar to mortgage insurance premiums on FHA loans and protects the lender from any defaults on loan payments, PMI for conventional loans can usually be dropped without much hassle once you have reached a certain about of equity on your home.
Buying a home, especially a first home, has many challenges from deciding on fixer-upper or move-in ready, picking the right lender or choosing a type of mortgage. But as you can see, there are a variety of mortgage options available for buyers looking to purchase their first home. It’s not always necessary to save every penny, or solicit gifts from friends or family to pay a 20% down payment on that dream home. If you don’t want to wait years to save up a down payment, these mortgage options could be the answer to your homeowner dreams.
