Many first time home buyers are under the impression that the only way to buy a home is to make a 20% down payment. Some borrowers do choose to make a large down payment. However it’s absolutely not necessary. In many cases it may not be the best decision, even if you are able to. Today there are many different options for buying a house with no or low money down.
These programs vary in their requirements. Some will require a form of insurance against risk of default. Most will have minimum credit score/income requirements. Be sure to contact a lender. If you’d like our list of preferred lenders whom we’ve worked with and trust, just contact us.
Below you will find five different types of low to no down payment loans. This overview should give you a general idea of how these low down payment mortgages work.
VA Loans –
A VA Loan is a loan issued by an approved lender and guaranteed by the US Department of Veterans Affairs (VA). The VA itself does not make the loan. The qualified borrower uses a lender who is approved by the VA.
The primary benefit of a VA Loan is that it can be used to purchase a home with no money down. The typical loan limit for a single residence is $424,100. However some areas of the US have higher limits. There is a funding fee which is based on a percentage of the loan. The percentage is lower if some money is put down and higher if no money is put down. Typically the rate is between 1.25% and 3.3%, again depending on how much money is put down. You can ask the seller to pay for the funding fee.
The qualified applicant must obtain a Certificate of Eligibility from the VA. Most approved VA Loan Lenders can assist with this. Your current status will determine how the CoE is obtained. Click here for further information: VA Loan Certificate of Eligibility
There are a variety of ways to use a VA Loan:
- Purchasing a home or VA approved condo
- Building a home
- Purchase and improve a home
- Purchasing a manufactured home and/or lot
- Energy efficiency related home improvements
FHA Loans, similar to VA Loans, are made by approved lenders and guaranteed by the Federal Housing Administration. Instead of a funding fee, and FHA Loan requires an insurance premium payment. This insurance premium helps cover the risk of default. The insurance premium is added to your monthly payment amount. You can be eligible to remove the insurance payment once certain conditions are met. Your lender can advise you of the requirements.
The appeal of FHA loans are the lower down payment requirements (as low as 3.5%) and more relaxed credit score requirement. Typically a conventional loan will require a higher credit score and down payment. The FHA loan was created to promote home ownership, and therefore has somewhat lower qualification standards. This is why the insurance is required to protect the lender and the guarantor (the FHA) from risk of default. FHA Loans are the most popular for people looking at buying a house with no or low money down
The amount of the insurance premium will depend on the purchase price, your down payment, and terms of your loan.
- 30 year loan, down payment (or equity) of less than 5% = .85%
- 30 year loan, down payment (or equity) of 5% or more = .80%
- 15 year loan, down payment (or equity) of less than 10% = .70%
- 15 year loan, down payment (or equity)of 10% or more = .45%
You may also like: FHA Loans 101
Qualifying for an FHA loan requires certain income, debt, credit score, and work history requirements must be met. Typically a credit score of 580 or higher will be required.
USDA Loans are no down payment loans made to eligible buyers in rural and suburban areas. Many people think of the USDA as only having to do with farms, but the loan is available in most areas. A USDA Loan provides approved lenders with a partial guarantee to offset the risks of extending a no down payment loan.
USDA Loans have income limits which vary by area and applicants must meet income eligibility guidelines. The applicant must also agree to occupy the home as their primary residence.
The HomeReady Loan
One of the newest programs designed to address the need of today’s borrower is the Home Ready Loan. Backed by Fannie Mae, the HomeReady Loan is similar to an FHA loan but with some important differences:
- May use the income of family or other occupants of the home to be considered for qualification
- Smaller Down Payment (as low as 3%, where FHA low is 3.5%)
- Co-borrowers not required to live in the home. So parents or other may assist with the home purchase
- Source of funds will need to be verified, however it is less restrictive than with FHA.
Borrowers must meet HomeReady Income Limits which vary by location. A homebuyer course must be completed which can be done online. The HomeReady loan is well suited for credit worthy borrowers who may have down payment or income issues. Though the rate can be higher, HomeReady does have higher debt to income ratios, allowing a larger loan amount than one may qualify for with an FHA Loan.
We hope you have enjoyed reading about buying a house with no or low money down. If you
still have questions, feel free to contact us at your convenience. We’d love to see how
we can help you and your family find the home of your dreams.
Neal Properties Team at Keller Williams Palm Beaches