If you’re starting your home search, you may have been told that you will need to put 20% down. While there are many benefits to putting 20% or more down on a loan, for many home buyers, it’s simply not possible. Due to student loan debt, increased interest rates, and a seller’s market, home buyers, especially rookie buyers, don’t have the resources to pay 20% down and closing costs. Rather than give up on the homeownership dream, home buyers would benefit from familiarizing themselves with options that don’t require 20% down to purchase a home!
How To Avoid Putting 20% Down On Your Home
One of the most common loan programs that assist home buyers in avoiding 20% down is an FHA loan. FHA is a government-backed loan. The benefit of an FHA loan to a home buyer is a much lower down payment! Based on a borrower’s credit score, FHA loans can have down payments that range from 3.5%-10%.
An FHA loan is a good option, especially for a first-time home buyer; however, there is some fine print buyers should be aware of before they sign on the dotted line.
- Mortgage Insurance is required
- The home being purchased must pass FHA safety standards
- Homes owned for less than 90 days by the current owner are not FHA eligible
Rural Development Loans
Another loan option that appeals to borrowers who are struggling with the 20% down is a rural development loan. With RD loans, borrowers can avoid putting any money down! This particular loan program is designed for low to moderate income borrowers and is strictly limited to certain geographic areas.
As with FHA loans, borrowers should be aware of the guidelines associated with RD loans:
- Homes must in a designated rural area. Not all geographic areas qualify for RD loans.
- Applicants must meet certain income criteria in order to be eligible
- Mortgage Insurance is required
VA Home Loans
A more specific loan program dedicated solely to active or retired military personnel is a VA home loan. This particular loan is not eligible to civilians; however, it has tremendous benefits for military personnel. With a VA loan, borrowers can avoid any down payment and avoid PMI. This loan is guaranteed by the Department of Veterans Affairs. While these loans are designated for military personnel, not all qualify. In order to qualify for a VA loan, the borrower must:
- Meet the service time requirements
- Have received an honorable discharge
- Spouses of a veteran who died in the line of service could be eligible
Home Ready by Fannie Mae
If borrowers are seeking a conventional loan with a lower down payment, Fannie Mae’s Home Ready program might be a good fit. With as little as 3% down, buyers can have a minimal down payment with this program. Like with other government-backed loans, mortgage insurance is required; however, this program has the option to have mortgage insurance removed once 20% equity is reached. Other factors are also important to consider:
- Borrowers may be required to attend a home education course
- Minimum credit score is required
- Free from geographic restrictions
- Designed for low to moderate income borrowers
Good Neighbor Program
One of the most enticing options to help home buyers is also one of the most restricted options. The Good Neighbor Program is intended to assist with the purchase price, not down payment. This program is not a loan program, but a program that offers incentives to teachers, firefighters, law enforcement and EMTs. The Good Neighbor Program offers half-price homes to eligible individuals. Not all homes are eligible and must meet certain criteria. However, a $100,000 eligible home could be purchased for $50,000 to qualified candidates.
In addition to a reduced purchase price, if a borrower secures an FHA-insured mortgage, they are eligible for a $100 down payment! While the Good Neighbor Program sounds incredibly enticing, there are very strict guidelines to be eligible:
- Borrowers must agree to occupy the home for 36 months
- Borrowers must sign a second mortgage for the discounted portion
- You may be required to pay back the discount if you fail to meet the occupancy time
- You must be employed full-time
- Only certain properties are eligible for the Good Neighbor Program
In addition to government-backed options that assist home buyers, many local banks & municipalities have options to assist in helping with either closing costs or down payments. When seeking out a lender, be sure to ask if there are any assistance programs available. To get started with the loan process, access the mortgage calculator and refinance options, be sure you’re utilizing the Homes Mortgage Hub.