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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5 Reasons VA Loans Had Their Biggest Year Ever

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One of the most cherished benefits for veterans and military families is celebrating a tremendous milestone, not to mention making waves in the housing market.

With a big boost from much-coveted millennial homebuyers, the VA loan program set a new all-time record for mortgages in fiscal year 2016, according to the Department of Veterans Affairs.

The VA backed more than 707,000 loans, a 12% increase from last year and nearly double the agency’s volume from five years ago. Loans to help veterans and military members purchase homes were up almost 10% from last year’s numbers, a sign of the housing market’s continued recovery. The VA loan program’s fiscal year runs Oct. 1 to Sept. 30.

“Over the last five years, we’ve really focused our efforts to improve the efficiency of the program and to increase market awareness,” said John Bell, a Navy veteran and assistant director for loan policy and valuation for the VA loan program. “I think we’re seeing the fruits of that labor, so it’s an exciting time for us and for the veterans we serve.”

Here’s a look at five keys to this historic program’s biggest year ever.

1. Veterans Believe in Homeownership

Earlier this year, the nation’s homeownership rate (62.9%) fell to a 51-year low, according to the Census Bureau. Meanwhile, VA data put the veteran homeownership rate more around 80%.

Market share for this niche mortgage product in particular has soared since the housing crisis. This year’s record volume represents a 395% increase from a decade ago.

The VA has now backed more than 3.3 million home loans since fiscal year 2011. To put that into perspective, the VA didn’t guarantee 3 million loans in the 11 years prior to FY11.

“Homeownership for veterans is more personal than it is for many other people,” said Kenneth O. Preston, the 13th Sergeant Major of the Army. “To actually have ownership and a piece of the country that they defend is something that is very powerful.”

2. Conventional Financing Is Still Tough

VA loans were created to help give veterans a foothold in the housing market. During a time of tight credit and lagging income growth, they continue to be a lifeline for borrowers who might struggle to lock down conventional financing.

VA buyers can purchase with $0 down payment, no mortgage insurance and more lenient credit underwriting. Conventional loans often require a 5% down payment, monthly mortgage insurance and a more robust credit profile.

Through the first nine months of this year, the average VA buyer had a 706 FICO score, compared to an average 753 score for conventional buyers, according to Ellie Mae. (If you don’t know where your credit stands, you can get two free credit scores, updated every 14 days, at Credit.com.)

3. Lowest Average Mortgage Rates

VA’s rock-bottom mortgage rates surprise a lot of consumers, albeit it’s a pleasant one for many buyers. For 29 straight months and counting, VA loans have had a lower average rate than both FHA and conventional loans, according to Ellie Mae data.

The streak undoubtedly runs longer, but Ellie Mae didn’t start publishing VA loan data until, well, 29 months ago.

Pursuing conventional financing used to be a no-brainer for veterans with stellar credit and assets. And in some cases it may still be the best route. But VA’s low rates are giving many well-qualified buyers another reason to comparison shop.

5. Millennial Veterans Are Buying

The VA loan program’s benefits recognize the unique financial strains facing veterans and military members. Younger veterans and military families are seizing on the opportunity.

Bell said nearly a third of VA buyers in FY16 were millennials. That squares with recent survey data from the National Association of Realtors, which also found a surge in homebuying among younger veterans and military members.

“Despite having a lower median income ($76,800), more stable job security and no down payment financing options give aspiring homeowners in the military a deserving advantage over their civilian peers,” said Lawrence Yun, NAR chief economist.

6. Strides in Awareness

Surveys have shown that about 1-in-3 homebuying veterans didn’t know they had a home loan benefit. Education efforts by the VA, the Defense Department, mortgage lenders and real estate agents have all helped raise awareness about VA loans and their benefits.

To be sure, VA loans aren’t the answer for every military homebuyer. But for many military families, this historic benefit program continues to represent the most cost-effective path to homeownership.

“More than 70 years after its creation, this home loan benefit is still making a tremendous difference for veterans and their families,” Bell said. “We want to build on our successes to ensure that next year and the years to come provide even more value for veterans and their families.”

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U.S. Foreclosure Activity Went Way Up in October

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