In today’s U.S. housing market, home buyers do not need to make a 20 percent down payment. It is a common misconception that “20 Percent Down” is required to buy a home.
In fact, the options for buyers looking for a down payment of 3 or 3.5 percent has never been better.
Government low down payment loans are the best known and most popular, beginning with FHA, which provides loans at 3.5 percent down for qualified buyers. The US Department Agriculture offers loans with no down payments to residents in rural areas and VA loans requires no down payment from veterans.
State and local housing authorities and local employers offer more than 2000 down payment assistance programs to qualified buyers. To find out more about what is available in your market, visit downpaymentresource.com, a national database that will link you to local programs.
Fannie Mae and Freddie Mac also recently launched 3 percent down programs. Both require mortgage insurance and homeownership education, but they are worth checking out.
Within the last two years, several banks have entered the low down market, revisiting territory that they abandoned after the housing crash in 2006-2007. Many believe low down payment loans hastened the foreclosure crisis because owners who had put little or nothing down had no “skin in the game” and were more likely to default on their homes when values plummeted.
New, stricter financial regulations, as well as mandatory mortgage insurance, protect conventional lenders against default, making it possible to offer low down payment loans at attractive rates.
Here is a brief look at a few of the new programs. In addition to these, you might ask your local lender for information on low down payment loans available in your market.
Bank of America
This mega bank offers 3 percent down payments to low- and moderate- income borrowers for home loans for up to $417,000. To qualify, borrowers cannot make more than the median income for their area and need a credit score of at least 660. Interest rates on the loans will be determined by a borrower’s creditworthiness and score, and Bank of America’s says its interest rate will be cheaper than FHA’s. First-time buyers will have to attend a homebuyer education program.
This regional bank offers a low down payment program that looks a lot like BoA’s. BB&T H.O.M.E., Home Ownership is Meant for Everyone, NOW program is restricted to middle and low-income applicants and buyer education is required. Buyers can use income from gifts or non-resident co-borrowers to meet income qualifications. The home must be the applicant’s primary residence, and buyers must complete a homebuyer education course online.
Fannie Mae and Freddie Mac’s Conventional 97 Program
Also, the new low down payment programs from the GSEs designed for first-time buyers, the Conventional 97 loan is available to anyone. It is a 3 percent down payment program and, for many home buyers; it is a less-expensive option as compared to an FHA loan. Loan size may not exceed $417,000, even if the home is in a high-cost market. The Conventional 97 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.
Wells’ recently announced a new program that provides buyers a new down payment choice from a leading conventional lender. It allows income from occupants who are not borrowers or co-signers—such as a family member or tenant–to count towards income levels for debt-to-income ratios. It also allows the rent, tuition and utility bills to be included in credit scores.
Wells makes homeownership education optional and provides an incentive for those who complete ab education program by reducing the rates on loans by 1/8 percent for those who complete an education program.
These conventional programs from lenders require borrowers to meet existing lending standards for income, debt and credit scores. If you are a first-time buyer with marginal credit or a limited credit history, or if you are carrying significant student or consumer debt, you are probably better off with a 3.5 percent FHA loan than one of the new low down payment loans from a bank. FHA’s median FICO scores for approved purchase loans are more than 60 points lower today than they are for conventional purchase loans. For those carrying a large load of debt, FHA’s median ratio of monthly debt payments to income is significantly more forgiving than conventional loans.
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