Many years ago getting a mortgage required a good credit score and a large down payment of at least 20%.
That’s no longer the case since the Federal Government created several home loan programs making it easier for borrowers to attain a mortgage loan.
Here are some loan programs that allow for a low, or no down payment.
The Federal Housing Administration was introduced to help encourage home ownership in the U.S.You may qualify for an FHA loan with just a 580 credit score and a low down payment of just 3.5%. That’s a much lower down payment than conventional loans which require between 10% – 20% down.
One of the great things about FHA loans is that the down payment can be a gift from a friend or family member. Up to 100% of the down payment amount can be gifted to the borrower allowing for 100% financing to those who are receiving a gifted down payment.
The FHA also allows for higher debt-to-income ratios than other types of home loans. In some cases, lenders can allow for DTI ratios up to 50%. With this calculator, you can figure out how much house you can afford factoring in PMI and property taxes.
Pros and Cons of FHA Loans
- Low down payment
- Low 580 credit requirement
- Lower interest rates
- Higher debt-to-income ratios allowed
- Up to 6% of closing cost can be paid by the seller
- Non-occupying co-borrowers allowed
- Many FHA approved lenders nationwide
- Higher allowed debt-to-income ratios
- Low loan limits
- Fixer-upper homes can’t be financed
- Mortgage insurance premium required
- High MIP costs, up to 1% of loan amount
- Up-front MIP required
If you’re a Veteran you may qualify for a VA mortgage. VA loans are the cheapest type of mortgage loan available. They require no down payment and no mortgage insurance is required. In order to qualify, you must be an active, or retired Veteran or a Veteran spouse.
Like FHA loans, VA loans come with lower mortgage rates than most conventional loans do. They do require a higher credit score than FHA, most lenders require a minimum 620 credit score to receive 100% financing.
The U.S. Department of Agriculture created the USDA rural housing program to help loan to median-income borrowers become homeowners in rural parts of the country. USDA loans do not require a down payment.
Because they are 100 % financing lenders have higher credit score requirements. Typically you will need a minimum 640 FICO score to qualify for a USDA mortgage. When you think of the term “rural” you generally think of farms and ranches. However, about 97% of the country is in an eligible USDA location. Most areas that are 30 miles outside of major cities are USDA eligible.
Conventional 97 Loans
Fannie Mae is one of the largest buyers of mortgages in the U.S. Fannie Mae has started the 97% LTV conventional mortgage loan which requires just a 3% down payment. That’s even lower than FHA. To qualify for this loan program you must have at least a 620 credit score.
Some of the benefits of conventional loans are the higher loan limits than Government-backed mortgages. In low-cost areas of the country, the loan limit is $424,100 which is over $150,000 higher than the FHA limits. Like FHA loans, conventional 97 loans also allow 100% of the down payment to come from gift funds.
The Bottom Line…
There are many mortgage programs besides just FHA that offer low or no down payment loans. USDA and VA are the only two mortgages that offer 100% financing. If you’re not eligible for either you may qualify for FHA or a conventional 97 loan with low down payment requires, much lower than traditional financing.
Knowing your options is an important part of the process especially before speaking to a loan officer. Not all lenders offer all types of loans, knowing the different types of loan programs can help you save a bundle on your home.