How to Choose the Low-Down-Payment Mortgage That’s Right For You

Coming up with 20% down isn't always necessary. Here's what you need to know about lown-down-payment mortgage programs.

Low down-payment mortgage loans have been around much longer than most people realize. The Federal Housing Administration  loan requiring just 3.5% down re-emerged in 2008, but today, loans backed by the government requiring even less down are becoming popular. Here are the different kinds of low-down-payment loans available and what you should know about each.

1. FHA Loans

These are loans insured by the Federal Housing Administration that require just a 3.5% down payment and are incredibly flexible on financial history, credit history, and debt-to-income ratios. It is the most widely known low-down-payment program available in the market, is incredibly popular, and is virtually limitless in terms of the property type, income and location. Learn more about FHA loans here.

2. Conventional Loans

Some conventional loans require just 5% down, and in some cases as little as 3% down based on the per-capita-income in the area in which the property is located.

3. USDA Loans

This loan requires no down payment whatsoever and has income limitations and specific area locations. The program is only available in certain areas that are deemed agricultural by the U.S. department of agriculture.

4. VA

The U.S. Department of Veterans Affairs guarantees loans for up to 100% loan-to-value with absolutely no money down. This is hands down the best program in the low-down-payment arena. The program is available to U.S. military veterans and their spouses only.

5. Down Payment Assistance

Some state-specific programs allow homebuyers to put as little as $500 down to purchase a home. For example, in the state of California, a grant is provided for up to 5% of the loan amount, which can go toward the down payment and closing costs.

6. One-Percent Loans  

Some lenders are starting to offer mortgages for as little as 1% and, in some cases, even no money down with grants that need not be repaid. These loans are backed by Fannie Mae, and the lender bears the risk. You can bank on income limitations and needing good credit scores for such programs.

Keep in mind that the better the loan program you have, and the more down payment you have, the better your chances of getting into contract. Plus, most of the low down-payment loan programs available in the marketplace today, except for FHA and a traditional 5% down conventional loan, have income limitations. Income limitations mean your borrowing power in a certain geographic area is limited. Whereas, if you could use a 3.5%-down FHA loan or a 5%-down conventional, for example, your odds of getting into contract would be far greater because your borrowing power would be kicked up a couple of notches.

Here Is some homework to consider:

  • Do you have a down payment? If yes, where do those funds come from? Have you talked to your family about the possibility of getting gift funds for a down payment? You might be surprised by how generous your family could be.
  • If your down payment is very limited, get an honest answer from your real estate agent and lender about your ability to perform in this marketplace and what it would take to make you stronger on paper.
  • Get your financial house in order. That means checking your credit scores — you can see two for free on Credit.com. (the better your credit, the more home you can typically qualify for and the lower your interest rate will be), compiling your recent W-2s, pay stubs, and bank statements so you have enough information to provide to a lender.

Do not accept a lender giving you a just a pre-qualification letter. You want to be pre-approved. Any lender that will not give you a pre-approval letter is a lender that is more concerned about their policies than they are getting you into a home.

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