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Mortgages with Low Down Payment
Down payments are a large part of the home buying process and one of the biggest road blocks to home ownership. It is a common misconception that purchasing a home will require 20% down. This is simply not true and there are many loan programs available that allow just 3.5% to even 0% down payment for those who qualify. In many cases, the down payment can even come to you as a gift from a family member or a loved one.
Although putting 20% down may result in a more favorable monthly mortgage payment, most borrowers who are looking to purchase a home do not have the $70,000 or even $120,000 set aside for a down payment. It is important to work with an excellent loan officer and mortgage company who has access to loan products with various down payment options.
Below, we will discuss these low down payment home loans and who may have access to them.
Loan Options with 0% Down Payment
VA Loans — As Low As 0% Down Payment
Ever since its conception, the United States has been looking out for its military. In 1944, the GI Bill was signed into law and gave us the VA loan program. The loan — which is only offered through qualified lenders such as Residential Wholesale Mortgage, Inc. — allows for those who qualify to receive financing for homes that are equal to or less than their local county-wide loan limit without having to put any down payment forward. For example, the San Diego maximum 0% down loan limit is $1,000,000, meaning that a Veteran can purchase a home worth up to that amount with as low as 0% required down payment (click here to find out your county’s loan limit).
Homes valued higher than the local county loan limit will have to be financed through the VA Jumbo Loan program, which does require a small down payment. Some other benefits of the VA loan include the option to credit closing costs to the Veteran by the seller or lender, which means that in addition to the 0% down payment, the borrower will not be required to pay any closing costs associated with their loan. There is a required funding fee that all VA loans must pay, but this can be folded into the overall price of the loan to make it so that borrowers do not have to pay anything upfront to receive their loan. Veterans with service-related disabilities may be eligible to have this fee waived.
VA loans can be assumed (transferred to another person) and every VA buyer receives foreclosure avoidance advocacy, which means that borrowers will always have representation for finding alternatives in the event of a foreclosure threat. The program also does not require monthly mortgage insurance payments.
The VA loan program allows for flexible debt-to-income-ratio (DTI) requirements. Your DTI is the ratio between your overall debts and your gross income. While there is no requirement for lenders to stick to, a DTI of 41% is the standard. This means that you have a better chance of getting approved for VA loan if your house payment, taxes, insurance, HOA dues and total other debts (including student loans payments, car payments, etc.) are more than 41% of your income. Credit scores for these loans tend to have a benchmark score of 620 or above, however, like the DTI requirements, this may change from lender to lender.
So who can qualify for the VA loan? Regular Active Duty or Veterans may be eligible after 90 days of active duty status while Active Duty Reserves & Coast Guard are only eligible after 6 years of service provided that they haven’t served 90 days of federal active duty. Both of these groups also need a statement of service letter, which will be obtained by the lender. A Certificate of Eligibility is required for Retired Veterans. This will be pulled by the lender and some companies like ours will even acquire the certificate free of charge. Retired Reserves must have 6 years of service, 96 accumulated points through a “Points Statement,” and proof of honorable character of service to be eligible (for more information on points statements, click here). Retired National Guard must have 6 years of service and a statement of service (NGB 22). Lastly, spouses of service members who may have passed away in the line of duty or as the result of a service-related disability are eligible for the loan.
Call us to obtain your VA home loan Certificate of Eligibility — 800.865.6266
USDA — As Low As 0% Down Payment
The USDA loan is one program that can provide 100% financing with no down payment option. The U.S. Department of Agriculture insures this mortgage program, which helps homebuyers in suburban (defined as “a community with less than 20,000 residents”) and rural areas. It is highly recommended to explore your geographic eligibility because roughly 97% of the land mass in the U.S. is considered eligible for this unique loan program.
Since the loan program is income-based, household income cannot be higher than 115% of the median income for your area. For example, in San Diego, income cannot exceed $136,500 in many areas. If you are able to afford a 20% down payment you may have some trouble obtaining this loan, as better options might be available for you.
There are a few important eligibility details to know about when looking to obtain a USDA loan. Borrowers should have a credit score of 640 or above and must meet the qualifying debt-to-income ratio of 29/41. Your debt ratio is the ratio between your overall debts and your gross income. This means that your house payment, taxes, insurance, HOA dues and total other debts (including student loans payments, car payments, etc.) cannot be higher than 29% of your gross income and your total monthly recurring debts including home payments cannot be higher than 41% of your gross household income.
The loans are also guaranteed for the lender, which means that the USDA will reimburse lenders for the loan if the borrower defaults on the mortgage. Because the loans are guaranteed, borrowers must pay mortgage insurance (MI). This MI is typically lower than other loan traditional mortgage options and at the time of this article, USDA mortgage insurance premiums are at an all-time low. This premium comes in the form of an upfront fee and an annual fee. The upfront fee is 1% of the loan amount and is usually added into the overall loan amount. The annual fee is 0.35% of the loan amount, which is paid monthly as part of your mortgage payments to your lender.
USDA loans have more competitive rates, as low as 0% down payment, minimal monthly mortgage insurance, and a stable 30-year fixed-rate loan, which makes it especially attractive to many borrowers. Contact us to see if the USDA loan is the right option for you.
Loans with Low Down Payments
HomeReady or HomePossible Mortgage with a Three Percent Down Payment
The HomeReady Mortgage program was implemented in 2015 to expand homebuying eligibility as an income based loan program. Buyers who are eligible for the HomeReady mortgage program only need to put down 3% and receive many benefits such as more competitive monthly mortgage insurance rates.
One highlight of this program compared to others that only require 3% down payment is that the down payment source is flexible. Where other loans may require a minimum contribution from the borrower, the HomeReady home loan down payment may come entirely from other sources such as gifts or down payment assistance programs.
Under this program, you may be required to attend a home buyer education course and achieve a credit score of 620+.
Unlike other loans, you may be able to take advantage of a non-occupant co-signer’s income and boarder income (which is the income of roommates or tenants that you’ve lived with for the past 12 months), along with options such as rental income of mother-in-law suites at the home you intend to purchase. Income of household members who will not be on the loan may also be used as justification for your approval if you do not meet other HomeReady mortgage requirements.
There are income requirements associated with the HomeReady program and depending on the area of the home purchase. Properties in low income census tracks have no income limits, while for all other properties, borrowers must have an income of 100% of their area’s median income (AMI) or less. Look below to see California’s income eligibility map or visit the HomeReady Eligibility website to input your zip code and see if the home you are interested in has income restrictions. Or contact us and we can help look it up for you.
Conventional Loan with 3% Down Payment
The Conventional Loan is one of the most common loan programs among home buyers. With only 3% down, you will be able to obtain a loan for 97% of the appraised value. While the HomeReady Mortgage is catered to income levels, the Conventional Loan with only 3% percent down does not have the same income and geographical restrictions.
These loans may be fixed-rate loans or an adjustable rate mortgage for your condo or single family home purchase. For this low down payment option, it is important to know that the property must be a primary residence and the loan may not exceed the federal loan limit of $453,100 dollars. This option does not have any added costs for an upfront mortgage insurance premium like an FHA loan or an added funding fee like a VA loan.
FHA Loans (3.5% Down Payment)
Since 1934, FHA loans have helped ensure a robust and active real estate market by providing low down payment loan programs for home buyers. FHA loans are insured by the Federal Housing Administration and are a great way for first time home buyers or move up buyers to purchase a home. If a borrower defaults on a FHA loan, the federal government covers the lenders loss. Thanks in part to this insurance, prospective home owners generally have an easier time qualifying for an FHA loan compared to conventional mortgages. FHA loans can only be offered by HUD-approved lenders, like Residential Wholesale Mortgage Inc.
One of the most attractive features of the FHA loan program is the low down payment of 3.5%, which can be financed through gift funds or through down payment assistance programs (more on DPA programs later). It is important to consider that FHA loans require a 1.75% up-front mortgage insurance premium, which is typically financed into the loan amount. The borrower also pays a 0.85% annual fee for the mortgage insurance premium as a part of their monthly housing payment — this may be lower depending on your down payment. These premiums go to the Mortgage Insurance Fund for paying claims and covering general administrative costs.
FHA loan limits (click here to find out your county’s FHA loan limit) put a cap on the amount of funds you can receive under the FHA program. For example, San Diego’s County 2020 FHA loan limit is $701,500. This means that a borrower could buy a $635,000 home with only 3.5% down and finance the remaining balance with an FHA loan. If you are looking to purchase a 2–4 unit property, this amount may be higher.
The property must also be owner occupied as a primary residence, with single family dwellings, condos, and 1–4 unit properties all being able to receive financing through this program. Non-occupant coborrowers can also be included on the loan for qualifying purposes.
There are not any income-based or geographic restrictions for FHA loans, but there are flexible credit requirements. If your credit score is above 580 you may be eligible for this loan — make sure to ask your loan officer for a pre-approval. There is also debt-to-income ratio flexability depending on your down payment which may allow a ratio above 43% (All Recuring Debts inclduing new housing ÷ Gross Income).
Next we will discuss how you can utilize down payment assistance programs to achieve an even lower down payment.
FHA Down Payment Assistance Program: How to Get a 0% Down Payment
Borrowers who receive a loan under the FHA program receive many benefits, but a down payment of 3.5% is still required. Since the down payment can be paid in the form of a gift fund from relatives, employers, friends, charities, or programs run by governmental agencies/public entities, there are ways to receive a grant large enough to cover the cost of down payment. With one program in particular, you can receive up to 4.5% of the home’s value to use on the down payment, closing costs, and/or the required FHA upfront mortgage insurance premium.
The grant is restricted to loans that are on a 30-year fixed-term with a loan amount less than $453,100 dollars (or your county’s FHA 2020 income limit). Property requirements for this down payment assistance program allow for the financing of 1–2 units, with some manufactured housing also being eligible. The property must also be owner occupied as the owner’s primary residence.
To receive the grant, your income cannot exceed 115% of the property’s Area Median Income (if you are interested, you can find your local limits here). Your credit score must also be greater than or equal to 620 to receive the grant, although a score of 680 or higher will increase your chances of getting your loan approved. Lastly, the program requires at least one of the borrowers to complete a homebuyer’s education course.
To learn more about this down payment assistance program and whether or not you qualify for it, contact us and we can set you up with a home loan expert to review your eligibility.
Down Payment Assistance Program: How to Reduce Your Down Payment to 1%
At the time of this article, there are a few 1 percent down payment programs available to first time homebuyers. When combined, these two loan programs may get you a down payment as low as 1 percent. Many of these 1 percent programs are for a 30-year fixed-rate loan that also allow for a percentage of the down payment to come from gifts or subsidies.
One of these home loan programs that RWM Home Loans and our clients have access to will combine 2 loans in order to obtain a 1% down home purchase. The first loan will be for 97% of the home value and the remaining 2% may come from a second loan that may be forgiven. A second loan — also known as a 2nd trust deed — means that it is an additional loan on the home that does not have as high of a priority as the original (1st trust) deed. This second loan does not require a monthly payment and will be forgiven after 36 months of homeownership as long as the property is still owner-occupied and on time first mortgage payments have been made. Something to keep in mind is that you will still have to set extra money aside for any closing costs.
Other benefits of these programs are the lack of mortgage insurance requirements, competitive fixed-rate, and the option to refinance with only 5% equity in your home.
To qualify for many of these one percent down payment assistance loans, you must be a first time home buyer buying a home as your primary residence. The income requirements for down payment assistance programs vary based on city, zip code, and census tract, with properties located in certain income-based census tracts having no income requirements (visit here to see your area details). For areas outside of those tracts, the income limit tops off at 160% of the property area’s income.
Home buying counseling from a HUD-approved counseling agency may be required for some borrowers. For the best chance at loan qualification, it is important to make sure that your credits scores are above 660 (please contact us if you need to review your credit). Program availability will depend on the demand and money available — please contact us for information about 1% down payment options in your desired location. Alameda, Contra Costa, Los Angeles, Marin, Orange, San Francisco, San Mateo, Santa Clara, and Sonoma counties currently have access to this option, but more are being added every week.
To learn more about down payment assistance programs and whether or not you may qualify, contact us and we will set you up with a mortgage expert to review your eligibility.
Every financial situation is unique, and yours is no exception. Knowing your down payment options is one of the first steps to successfully financing your home. Talk to a lender today to see how you qualify and which programs are best suited to your needs.
We are here to help guide you and answer any questions you may have. If you are interested in a preparing for your home purchase or saving money with a refinance, contact us and our team will set you up with the right plan for your specific goal.
Financing details are for educational purposes only. Rates, program terms, fees, and conditions referenced are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc. dba RWM Home Loans is an equal housing lender licensed by the CA Department of Real Estate #01174642 and CA Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. NMLS# 79445