For most first-time home buyers, coming up with funds for a down payment is the biggest obstacle to homeownership. You have your regular monthly expenses. You’re trying to maintain or save for an emergency fund. Then there’s looking ahead to retirement and perhaps college tuition. Amassing thousands for a down payment may seem impossible.
There is good news! Before your lack of cash causes you to give up on your dream of homeownership, it’s important to know that you have options other than the standard conventional loan with a 20 percent down payment. Few lenders offer zero-down loans today, but there are still some programs that allow consumers with good credit and a steady income to buy without making a minimal or no down payment.
Government Zero-Down Programs
- VA loans: Veteran’s Affairs mortgage loans are available to veterans, current members of the military and their spouses. These loans don’t require a down payment or mortgage insurance, although there is a funding fee that can be wrapped into the loan.
- USDA Rural Development loans: Rural Development loans through the United States Department of Agriculture are available to buyers who meet credit and income requirements. You must be able to afford payments on the loan and yet have a low or moderate income. In addition, the property you are purchasing must be located within an area designated as eligible for these no-down-payment loans.
- State and local homebuyer programs: Most states have programs to encourage homeownership. Generally these programs have income limitations and require you to take a home-buyer class. Find links to programs in your state by visiting the National Council of State Housing Agencies website (www.ncsha.org/housing-help).
Low Down Payment Programs
FHA: With a minimum down payment of 3.5%, the FHA is a low-down payment option that's available to people with imperfect credit histories.
Unique features of FHA loan include:
- Your down payment may consist entirely from "gift funds"
- Your credit score requirement is 600
- Mortgage insurance premiums are paid upfront at closing, and monthly thereafter
Furthermore, the FHA supports homeowners who have experienced recent short sales, foreclosures or bankruptcies through the agency's Back to Work program.
The HomeReady Mortgage: 3% down payment
The HomeReady Mortgage is special among today's low- and no-down payment mortgages.
Backed by Fannie Mae and available from nearly every U.S. lender, the HomeReady mortgage offers below market mortgage rates, reduced mortgage insurance costs, and innovative underwriting guidelines.
Via HomeReady, the income of everybody living in the home can be used to get mortgage-qualified and approved.
- If you are a Homeowner living with your parents, and your parents earn an income, you can use their income to help you qualify.
- If you have children who work and contribute to household expenses, those incomes can be used for qualification purposes, too.
- You can use boarder income to help qualify
- You can use income from a non-zoned rental unit, too -- even if you're paid in cash.
HomeReady home loans were designed to help multi-generational households get approved for mortgage financing. However, the program can be used by anyone in a qualifying area or who meets household income requirements.
Conventional 95: 5% Down Payment
The Conventional 95 program is available from Fannie Mae and Freddie Mac. It's a 5 percent down payment program and, for many home buyers, it's a less-expensive option as compared to an FHA loan.
The Conventional 95 basic qualification standards include:
- Loan size may not exceed $417,000, even if the home is in a high-cost market.
- The subject property must be a single-unit dwelling. No multi-unit homes are allowed.
- The mortgage must be a fixed rate mortgage. No ARMs via the Conventional 95.
The Conventional 95 program does not enforce a specific minimum credit score beyond those for a typical conventional home loan. The program can be used to refinance a home loan, too.
If you’re lucky enough to have family members with the means and generosity to give you money towards your home purchase, you can use some or all of their gift depending on your loan program. The Federal Housing Administration allows all of the required 3.5 percent down payment to come from gift funds.
You can also borrow from your retirement funds for a down payment, but be sure you follow the rules exactly so you don’t get hit with a tax penalty.
Unique Home Lender Programs
Many home lenders have unique programs of their own. For example, Genisys Credit Union’s Your 1st Mortgage lets you borrow up to 95% of the home’s value with no mortgage insurance added to your payment.
Saving for a down payment is an important step in becoming financially prepared for homeownership, but you should also educate yourself on all of the home financing options that are available to you.
Schedule a FREE consultation with a Genisys Credit Union Mortgage Consultant to discuss your options and opportunities for financing a home purchase with a lower down payment.
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