September 13, 2021
Whether it’s buying a new car, a home gym, or a swimming pool, an offer of “nothing down” is an enticing thought. However, the reality is that when it comes to buying a house there are limited zero-down options. Moreover, you can only get a mortgage with no down payment if you take out a government-backed loan. Currently, the two types of loans that allow you to buy a home with no money down are USDA Loans and VA Loans. Both require very specific criteria that you need to meet to qualify.
According to the Motley Fool, the median down payment for a home purchased in early June 2021 was $27,850, though this number can vary from state to state. Furthermore, according to a survey conducted by the National Association of Realtors in 2020, the median down payment percentage was 12% of the home’s value.
However, there are a few options that offer low down payment options with a little as 3% down. These include FHA loans and conventional mortgages. It is important to note that mortgage insurance is typically required with most low-down-payment mortgage. Mortgage Insurance is an added monthly expense that you can learn more about by clicking here. Now, let’s take a closer look at how you can get the house that you want with an affordable down payment.
The U.S. Department of Agriculture offers a 100% financing mortgage. The program is also technically called a Section 502 mortgage, however, it’s more commonly known as ’Rural Housing Loan’ or a ’USDA loan.’
Despite the term “rural loan“ the USDA loan program is also available to low-to-moderate income homebuyers in less-populated suburbs of some major U.S. cities suburban areas.
Some key benefits of the USDA loan include:
To be eligible for many USDA loans, household income must meet certain guidelines. Also, the home to be purchased must be in an eligible rural area as defined by USDA. According to the USDA website applicants interested in obtaining a direct loan must have an adjusted income that is at or below the applicable low-income limit for the area where they wish to buy a house as well as demonstrate a willingness and ability to repay debt. (Note: household income includes the income of all adult household members.)
USDA mortgage rates are often lower than rates for comparable, low- or no-down-payment mortgages. For qualified applicants, financing a home via the USDA can be the lowest-cost path to homeownership.
A VA loan is a loan guaranteed by the United States Department of Veteran Affairs. Designed for active-duty military, Veterans, and their families, this loan requires zero money down. While standard mortgage insurance is not required, the Funding Fee is specific to VA loans and is paid upfront. For purchase loans, the one-time fee usually ranges from 1.4% to 2.3% of the loan amount, depending on the loan down payment.
The VA is technically not a mortgage lender as private lenders originate the loan, and the VA guarantees a portion of it. No down payment is required if the sales price isn’t higher that the properties appraised value.
Although VA loans are credit flexible, applicants must have a stable income, and a steady job, however, a Veteran may be retired to qualify. All applicants must also meet some basic military service requirements.
Here are a few of the requirements listed by the U.S. Department of Veterans Affairs.
There are also VA loan programs for surviving spouses of a service member who died in the line of duty or from a service-related disability.
For the lender to make a VA-backed loan you must provide proof that you meet the eligibility requirements. A Certificate of Eligibility, or (COE,) serves as that proof. Your COE will have the entitlement amount on it so the lender knows exactly how much the VA will give them if you were to default. Detailed information on how to obtain a COE for a loan can be found on the VA website.
Other lower down payment options include the FHA 3.5%, Fannie Mae HomeReady 3.5%, and Conventional loans. Let’s look at how much of a down payment is required for each.
A loan backed by the Federal Housing Agency (FHA) requires a down payment of 3.5%. A monthly mortgage insurance premium (MIP) and upfront mortgage insurance premium (UFMIP) of 1.75% is paid on every loan regardless of down payment.
This type of a conventional loan is designed to provide affordable mortgages to borrowers with low-to-moderate income. With Fannie Mae HomeReady, homebuyers can get started with as little as 3% down. (Note: With this program the down payment does not need to be from borrower's own funds, it could result from a gift. Also, at least 1 borrower must complete homebuyer education when all borrowers are first time homebuyers.)
Another type of conventional loan, Freddie Mac Home Possible offers flexible, expanded guidelines, and requires a down payment of 3%. (Note: With this program the down payment does not need to be from borrower's own funds, it could result from a gift. Also, at least 1 borrower must complete homebuyer education when all borrowers are first time homebuyers.)
When it comes to the right loan option including lower down payments, there are a variety of options depending on your unique situation. Whether you’re looking to buy now or just starting your research, familiarizing yourself with down payment requirements can help you make an informed decision when the time is right for you.
Newrez is here to help you explore the options available as well as help you determine the most effective path for making your dream of homeownership come true.