Buying a home is a goal for most US citizens. However, next to other requirements such as a credit report, saving for a down payment of 20% isn’t an easy task. The good news is that sometimes you can make a loan with a low down payment – or even without it.
If you are planning to become a homeowner, you will probably be delighted to learn that there are no down payment home loans, as well as mortgages with a rather low down payment. If you are interested into learning more about low down payment mortgage options, here’s what you need to know.
Pros and Cons of Low Down Payment Mortgages
When you are considering purchasing a home with a low down payment loan, first think you should do is to weight down the pros and the cons of low down payment mortgages.
When you have a low down payment, you can purchase home easier and faster. This is best seen if you live in an area with high home prices. When you don’t have to wait to collect money for the down payment, you can purchase your dream property faster, before someone else grabs it. Also, when you save money on down payment, you will have more cash to spend on urgent things, such as remodeling, purchasing furniture or making some repairs.
When you purchase a home with a low down payment loan, you won’t get much equity in your home, as you’ll owe almost 100% of the home’s value. This means that if you find yourself in an emergency, you won’t be able to tap into equity. Also, this might result in you owing more on the house than it’s worth, which will make it nearly impossible to sell your house and move. Another disadvantage is that in a lot of cases you will be forced to pay a mortgage with a higher interest rate, as you will be deemed a ‘higher risk’ by your lender. The last bad thing is that you might end up having to pay extra fees. Most low down payment home loans come with additional expenses.
Some Low Down Payment Loan Options
If you have decided that you want to use some of the low down payment mortgages, we have made a brief list of several types of loan options that come with low or even no down payment.
The US Department of Agriculture is offering a 100% financing mortgage. This program is officially known as a Section 502 mortgage, but you might have heard about it under the name Rural Housing Loan. If you are looking to purchase a property in the suburbs, you might be eligible for it.
The benefits of this loan include:
- Home repairs and some improvements are included in the loan size
- You will have a mortgage insurance which is collected monthly
- There is a maximum price for home purchases
If you thought that FHA doesn’t make loans, you were right. The FHA is actually just an insurer of loans. They publish a series of standards for the loans it will insure. Their guidelines are famous for having a liberal approach to credit scores and for low down payments. They will even insure a home loan for borrowers who have a rather low FICO credit score, as long as there is a reasonable explanation for the damaged credit. Your credit can be as low as 500! You can even make a loan despite recently going through a foreclosure, bankruptcy or a short sale. The FCA insured loans will allow a down payment of just 3.5%! They cover several ‘high-cost’ areas.
The VA loan is a 100% financing program available to the members of the US military and their spouses. It is guaranteed by the US Department of Veteran Affairs, similarly to the FHA loans. VA loan has straight-forward qualifications, which include that the borrower has to be either active duty or honorably discharged service personnel, or to have spent at least 6 years in the Reserves or National Guard. Spouses of service members killed in the line of duty are also eligible.
Some benefits of VA loans include:
- No required mortgage insurance
- You can use intermittent occupancy
- Bad credit report and bankruptcy don’t disqualify you
The HomeReady Mortgage
This mortgage is backed by Fannie Mae and available for almost all US lenders and offers a low down payment of just 3%. Other advantages of this mortgage loan include reduced mortgage insurance costs. The income of everyone who lives in the same home can be used to get approved for this loan. For example, if your child earns a big income, you can use his/her income to help you qualify, as these loans were designed to help households with multiple generations.
The Piggyback Loan
This type of low down payment loan is usually reserved for buyers who have above-average credit scores. The Piggyback Loan includes not one, but two loans, which will help buyers by providing them with additional flexibility and lower overall payments. It has an 80/10/10 structure, which means that you will have a 10% down payment, while the rest is split into parts. The first loan is 80% of the home’s purchase price, which is usually conventional and made via Freddie Mac or Fannie Mae. The other ‘10’ represents second mortgage – which is why it’s called ‘Piggyback’ – and a loan for 10% of the purchase price. This loan is usually a home equity loan (fixed rate) or home equity line of credit (adjustable rate). Buyers can choose the option that suits their needs.
As you have seen from the previous options, you don’t always have to pay a 20% down payment. Most buyers don’t know they have other possibilities, and that they aren’t that hard to acquire. You can even use cash gifts as a down payment on a home, if you’d like. The most important thing is to calculate everything and to make an agreement which is the best for you and your financial capabilities.