When you first consider purchasing a home you will want to establish a monthly and down payment budget with your Loan Consultant.  If you have a limited budget for down payment, there are some low down payment options available to most borrowers.  Each loan program has set qualification guidelines and requirements that must be discussed with your Loan Consultant for pre-approval.  The following general information is to assist in understanding the programs presently available that offer lower down payment options.

Did you know that the #1 barrier for potential First-Time Home Buyers is the down payment requirement?  Or more importantly, what they THINK the down payment requirement may be?

Most assume that you need 20% down, but that is far from the truth.  Today, there are many great low down payment loan options including:

Conventional:  As little as 3% down (which can also be 100% gift, 401k loan, etc.)   

FHA:  As little as 3.5% down (which can also be 100% gift, 401k loan, etc.)   

VA:  As little as 0% down

USDA:  As little as 0% down

See below for more details

Low Down Payment Loan Options

–          Conventional Conforming (backed by Fannie Mae and Freddie Mac) allows down payments as low as 3% (Fannie Mae) if defined as a first-time home buyer (first-time buyer in this case defined by those who have not owned in the last 3 years).  If property has been owned in the last 3 years or if you are not a first time home buyer, than 5% down available.  Gift funds allowed- see definition below.  FHA  VA  USDA

–          Fannie Mae Home Ready & Freddie Mac Home Possible.

These programs are generally for low to moderate income borrowers with down payments as low as 3% as well as reduced private mortgage insurance premiums (PMI) helping reduce the monthly payment.  You do not need to be a first time home buyer in order to qualify for this program.  See additional details below.  Gift funds allowed- see definition below.

Income on these affordable programs are limited by the Area Median Income (AMI) and census tract (see your Loan Consultant with questions and if your income qualifies for the area of interest).

Under Fannie Mae’s HomeReady program most areas do have an income limit, however some specific areas do not.  You can search an address HERE.

Under Freddie Mac’s  Home Possible program there will also be some income restrictions determined by the area/address.  You can find more information about Freddie Mac Home Possible Affordable Income and Property Eligibility HERE. 

Contact a Loan Consultant to verify and with any questions on the benefits on these programs.

The PMI coverage is reduced to 25% from 30% on both of these programs, essentially reducing that monthly payment slightly from traditional conforming programs.

For Fannie Mae’s HomeReady program, Framework home ownership education is required prior to close for at least one borrower.  You can register for this course HERE.

Homebuyer counseling courses are also required under Freddie Mac’s Home Possible Program and free of charge.  

You can access CREDITSMART Course HERE

–          FHA financing allows down payments as low as 3.5%.  Gift funds allowed- see definition below.

–          VA (Veterans Administration).  For those brave men and women who have served, VA financing is an excellent benefit when purchasing a new home.  VA offers 100% financing with no private mortgage insurance (PMI) 

–          USDA/Rural Housing.  This program offers 100% financing for low to moderate income borrowers in specified rural areas.  It also has a reduced private mortgage insurance premiums (PMI).   

Private Mortgage Insurance (PMI)

Private mortgage insurance is an insurance to protect lenders and guarantee payment when a borrower defaults.  This insurance is generally required when the borrower puts less than 20% down. 

Conventional financing offers ways for most borrowers to pay a monthly premium, or waive the monthly premium through a slight increase to interest rate called “lender-paid” PMI.  This monthly PMI can be reduced based off the loan to value (LTV) ratio and down payment amount.  This monthly PMI can be automatically canceled or manually canceled when the home exceeds 20% equity.  See Loan Consultant with questions.

FHA monthly mortgage insurance generally is a set amount that can vary slightly with loan term and down payment.  Unfortunately this PMI is lifetime and can never be removed from payment on FHA mortgages. 

There are many complexities to PMI and it is suggested that you speak with a Loan Consultant to get an understanding of the payments, costs, and details associated with it.  On Ginnie Mae/government guaranteed or insured mortgage loans (FHA, VA, USDA), up-front financed fees may also apply as well which you will want to discuss with your Loan Consultant when comparing against conventional loan programs.

Gift Funds

Many programs allow for the use of gift funds to meet part of all of the down payment requirements.  Gift funds cannot come from any interested party in the transaction, but in most cases can come from an immediately family member or blood relative.  Conventional loans carry a more restrictive requirement on the definition of family member or blood relative, while FHA will be more flexible on who is eligible to provide gift funds to the buyer.  How these gift funds are tracked and documented will also slightly vary on conventional and FHA loans.  As always, talk to one of our Loan Consultants for the specifics.

Closing Costs and Prepaids

Remember that above the down payment amount, closing costs and prepaids will apply.  This amount will greatly vary depending on program and pricing, but seller or lender credits can be used to cover some or all closing costs (as well as any gift funds or borrower funds above minimum down payment requirement).

Low down payment conventional and government loans will offer a variety of pros and cons as it pertains to interest rates, terms, and payments.  Personal considerations should be made on budgeting and long-term planning.  Contact a Loan Consultant today with questions and for pre-approval.

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