Mortgage 101: Working With A Small Down Payment? You’ve Got Options
Ready to Buy a Home But Struggling With the Loan?
Ideally, when you’re set to purchase a home you’ll have a good-sized down payment saved up and ready to go, but for many would-be homeowners stashing away a year’s salary or more simply isn’t possible. Does that mean they can’t afford to purchase a home? Not at all! There are plenty of home loan options that don’t require the traditional 20% down payment to qualify. If you are in a position where homeownership seems out of reach due to down payment considerations, then you owe it to yourself to check out these home loan options that can help you achieve your dream of homeownership with a small down payment.
The Federal Housing Administration is a federal agency that, among other things, insures mortgage loans from private banks to make homeownership affordable for those who might not otherwise be able to purchase a home. Unlike conventional mortgages, FHA loans require mortgage insurance throughout the duration of the loan, but they allow banks to grant mortgages with as little as 3% down. Also, the credit conditions for FHA loan qualification are more lenient than typical mortgages, making them an ideal path to homeownership for would-be buyers with blemished credit.
Zero-down mortgages are available through the United States Department of Veterans Affairs. To qualify for these home loans, one must be a veteran, active duty service member, current or former National Guard member or reservist, or a surviving spouse of a veteran. These home loans are also exempt from the mortgage insurance requirement attached to FHA loan products, so they’re a great deal for those who qualify.
While many conventional mortgages require a substantial down payment, “Conventional 97” mortgage from Fannie Mae and Freddie Mac, also known as the “Expanded LTV” program, do not. These mortgages require 3% down, and unlike their previous incarnation (discontinued in 2013), the reconfigured version can be used for refinancing as well as new home purchases. Conventional 97 loans are configured as insured, 30-year, fixed-rate mortgages, and are only available for primary residences.
The U.S. Department of Agriculture offers a mortgage that is similar to the VA’s mortgage loan program. With a Rural Housing loan (also known as the Section 502 Mortgage), buyers can purchase a home with no money down. The loan does require mortgage insurance and a guarantee fee, but home repairs and improvements may be included in the total loan amount. Despite the program’s name, it’s not just available in isolated areas–Rural Housing loans may be granted in the suburbs of certain cities. USDA-backed loans tend to feature very attractive interest rates compared to loans backed by other government agencies, and they’re available to people in a wide range of income brackets.
Piggyback loans are basically second mortgages, but they close simultaneously with the first mortgage. Their interest rates tend to be higher than those offered on conventional first mortgages, but they eliminate the need for private mortgage insurance. Some piggyback loans require a “balloon” payment to be paid at the end of the term, but homeowners who choose this option have plenty of time to prepare themselves to pay it.
Down Payment Assistance
Some state and local government entities offer down payment assistance programs for prospective homebuyers of limited financial means. To qualify, borrowers must earn less than the specified income threshold, but those limits are higher than many borrowers assume, especially for homebuyers with children.
Homeownership May Be Closer Than You Think
Yes, there’s some extra paperwork involved, and qualifying may mean undergoing mandatory homeowner education classes, but for those in need, these assistance programs can be well worth the extra effort. If you’ve been operating under the assumption that you’ll need to save at least 20% before qualifying for a mortgage, then these programs should be a breath of fresh air. Take advantage of them, and your dream of becoming a homeowner may be much more attainable than you previously thought.
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