No-down Payment Mortgage Options

This is a mortgage that gives a first time home buyer and repeat home buyers the chance to purchase a property without paying at closing, except the standard closing costs. Other options are the HomeReady mortgage, FHA loan, and the Conventional 97 loan, and they allow you to put in as little as 3% as the down payment. It is common to find mortgage insurance premiums including no down payment or low down-payment options, but this is not always the case.

Is a no-down payment mortgage the right option for you?

It is a great time to buy a home. Supply is dropping, sales are rising, and home prices are increasing in most neighborhoods and cities. Today’s market might be a bargain compared to the next year.Even better, the mortgage rates are low. Compared to the past, the rates are cheap for 30-year, 15-year, and 5-year loans. This means the monthly costs of owning a home are low.

First Time Home Buyers

USDA loans no-down-payment (100% financing) 

The US Department of Agriculture offers no down payment mortgages. The program is known as a ‘USDA loan’ or ‘Rural Housing Loan’, but the formal name is Section 502 mortgage.

The name might make you believe that the loans are only given to people who want to buy in rural areas, but that is not the case. You can get this loan if you want a suburban neighborhood. The goal of the USDA is to help low-to-moderate income homebuyers no matter their location.

Most people benefiting from USDA loans are living in neighborhoods that cannot be considered in a ‘rural area.’ College towns like State College Pennsylvania, Christiansburg Virginia, and even suburbs of Columbus Ohio meet the eligibility standards for USDA loans. Less-populated suburbs in the major cities meet the eligibility standards.

Benefits of USDA loans are:

  • No need to make a down payment 
  • It can include home improvements and repairs in the loan amount 
  • It doesn’t have a maximum home purchase price 
  • The upfront guarantee fee can be included in the loan balance when you close; mortgage insurance is going to be paid monthly 
  • Keep in mind that there is an income limit enforced; your income needs to be below or near the median income for your area. 
  • Another benefit is the rates tend to be lower compared to low or no-down-payment mortgages. USDA loans are the lowest-cost path to ownership.

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Low-down Payment Mortgage Options 

Other options are the HomeReady mortgage, FHA loan, and the Conventional 97 loan, and they allow you to put in as little as 3% as the down payment. It is common to find mortgage insurance premiums including no down payment or low down-payment options, but this is not always the case.

The HomeReady Mortgage (3% down) 

This is one of the special options among the many no down payment or low down payment mortgages. 

These are available for almost every lender and are backed by Fannie Mae. The loans offer below-market market rates, the most innovative underwriting in over a decade, and reduced mortgage insurance costs. When it comes to HomeReady mortgages, the income of everyone living in the home is going to be used to qualify and approve the loan.

If you live with your parents and are a homeowner, and if they have an income, then their income can be used. If you have children working and contributing to the household expenses, then their income can also be used in applying for the mortgage. This program allows you to qualify using broader income, even if the income is coming for a non-zoned rental unit – even if you are getting paid in cash. These loans were introduced to help multi-generational households to get mortgage financing. The program can still be used by anyone in qualifying areas, or those meeting household income requirements. 

FHA loans: Low down payment (3.5% down)

When it comes to FHA mortgages, you need to know that it is not the Federal Housing Administration lending your money, they are just insuring the loan.They publish a series of standards for loans they are going to insure. When these guidelines have been met, they are going to insure the loan against loss.

Their guidelines are great because they are a bit liberal when it comes to down payments and credit scores. Borrowers with low credit scores can get loans, but they need to have a reasonable explanation of the low credit score.You can get this loan by making a down payment of just 3.5% across the U.S. markets, with a couple of FHA-approved condos exempted.

Other Benefits of FHA loans include: 

  • You can use down payment assistance or gift funds as a down payment for the loan 
  • The minimum credit score for a 3.5% down payment is 580, and 500 for a 10% down payment 
  • They can add upfront mortgage insurance to the loan; which you can then pay monthly 
  • FHA can also help those who have recently experienced short sales, bankruptcies, and foreclosures.

They insure loans of up to $822,375 in “high-cost” areas across the country. Some areas designated as high-cost areas include the Washington D.C. metro area, Orange County California, and New York City’s S boroughs. To get an FHA, the home being purchased has to be your primary home. This program is not meant to be used for investment properties and vacation homes.

Mortgage Guide - 7 Steps to Consider When Purchasing Your Home

7 Steps to Consider When Purchasing Your Home

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Conventional loan 97 (3% down) 

The program is available for Freddie Mac and Fannie Mae. The down payment is 3%, and for buyers, it is less expensive compared to an FHA mortgage.

The qualifications are: 

  • The loan cannot exceed $548,250, even if it is in a high-cost market 
  • The mortgage has to be a fixed rate. You aren’t allowed ARM when applying for this loan 
  • No multi-unit homes allowed, the property has to be a single-unit dwelling 
  • There is no minimum credit score enforced in the conventional 97 programs.   

The Conventional 97 program allows you to fund the entire 3% down payment using gifted funds, provided the gifter is your relative by blood or marriage, domestic partnership, legal guardianship, fiancé, or domestic partnership.

VA Loans (100% financing) 

This is a VA loan program that doesn’t require a down payment and it is for members of the military and surviving spouses. 

The mortgage is backed by the US Department of Veterans affairs. They are similar to FHA loans in that VA guarantees the loans for those who meet the guidelines. The qualifications are pretty straightforward as well. Most veterans, those who were honorably discharged service personnel, and active duty are eligible for VA loans. Homebuyers who have 6 years or more in the National Guard or Reserve are eligible. Spouses of service members killed while on duty are eligible too.

Benefits of VA loans include:

  • No down payment needed 
  • Below-market mortgage rates 
  • Flexible credit score minimums 

You are not immediately disqualified by bankruptcy and other derogatory information. No need for mortgage insurance, the only thing you have to pay for is a one-time funding fee, and this can be added to the loan amount. There is no maximum loan amount for VA loans. You can get a VA loan that is above the current conforming loan limits, provided you show that you have enough credit and can afford the payments.

The “Piggyback Loan” (100% financing) 

This type of loan is also known as the “80/10/10” and it is for buyers who have an above-average credit score. There are two loans, and this is to make it more flexible and lower the overall payments.

The great thing about this program is the structure. The buyers are required to have a 10% down payment when closing. This means the remaining 90% of the home sale price is for the mortgage. Instead of having one mortgage that is 90%, it is divided into two parts. The first is the ”80”, which is the first mortgage and the loan is going to cover 80% of the purchase price. This tends to be the conventional loan via Freddie Mac or Fannie Mac. These mortgages are offered at the current market rates.

The first “10” is the second mortgage. This is a loan that is 10% of the purchase price. The loan can be either a home equity line of credit (HELOC) or a home equity loan (HELOAN). Home equity loans are fixed rates. Lines of credit are adjustable-rate. The buyer can choose between the two options. HELOC is more common because of its flexibility in the long term.

The last “10” is what the buyer is going to put as the down payment, which is 10% of the home’s purchase price. The amount has to be paid in cash when closing. 80/10/10 loans are usually referred to as piggyback loans because the second mortgage “piggybacks” on the first increasing the total amount. 80/10/10 loans help buyers get access to great pricing in the market, and this is why lenders can recommend an alternate structure. If you want to buy a condo, then you can look at 75/15/10 because condo mortgage rates are better when the LTV is 75% or less.

Another example, HELOCs’ interest rates can be the better option when it is larger loan size. The lender can advise increasing the size of HELOC because it is going to lower the loan costs. You are the one to decide the loan structure that works best for you. You cannot be forced to borrow more on the second mortgage than you are comfortable with. It is not a must for buyers to have 20% down 

First Time Homebuyer Tips

You don’t need “20 percent down” before buying a home.

This might have been the case at some point in history, but this hasn’t been the case since FHA loans were introduced in 1934.Buyers don’t need to have a 20% down payment to buy a home in today’s market. Some still believe this is the case.One reason why most believe that you need a 20% down payment is that you are forced to pay mortgage insurance if you don’t. This isn’t necessarily a bad thing.

Private Mortgage Insurance (PMI) is not evil. 

PMI is neither bad nor good, but many buyers try their best to avoid it. The goal of the PMI is to protect the lender in case of foreclosure – that is all. PMI gets a bad rep because it costs buyers money. This shouldn’t be the case. When private mortgage insurance is involved, the buyer can get approved even if they have less than a 20% down payment. Eventually, it can be removed. With the current home value increase rate, then a 3% down can mean them paying for PMI for less than four years. This is not a long time. Yet many usually put off purchasing a home because they are hoping to save 20% down.

Home values are also increasing.

If you want to buy a home, then you shouldn’t only consider the size of the down payment. Home affordability is no longer about affordability – it is whether you can make payments while still having cash to take care of other things in your life. When you put a large down payment, you are going to pay a smaller monthly mortgage payment. If you have taken your life savings to use as a down payment, then you are putting yourself at a lot of risks. 

It is not a good idea to use up your entire savings. When you have the majority of your money tied to your property, it is referred to by experts as being “house-poor.” This is when you have a lot of money “on paper,” but you have little to use for emergencies and everyday living expenses. Emergencies will always be there, as every homeowner will tell you.Water heaters break, roofs collapse, or you can get sick and stop working. Insurance can help with these issues, but that isn’t always the case.This is why it can be dangerous to be house-poor.Some believe that putting 20% down on a home is being financially conservative. But if you are using all of your savings as a down payment, then that is the opposite of being financially conservative.The best option is making a small down payment and leaving some money in your bank. Don’t be house-poor.

Mortgage down payment FAQs

Below are some of the answers to frequently asked questions on matters to do with down payments.

Is it possible to buy a home with no money down? 

If you are looking to buy a home with no money down, then you need to find a no-money-down mortgage and apply. It is okay if you don’t know the mortgage loan that is best for you. A mortgage lender can provide you with the right information and direct you to the best options. There are many 100 percent mortgages being offered to buyers.

Can I use Cash Gifts as a down payment? 

Yes, they can be used as a down payment. Make sure you follow the right procedure if you are going to receive a cash gift.

Make sure that it is made using a cashier’s check, a personal check, or a wire: make sure you have a record of the gift, which includes the photocopy of the check. Ensure that the deposit matches the amount of the gift.The lender is going to want to verify that it is not a loan in disguise, but a gift. Gifts are those that don’t require repayment.

What are down-payment assistance programs? 

These programs are available across the country and 87% of US single-family homes qualify for them. The programs vary from one state to another, and you need to talk to the mortgage lender so they can provide you with options you might qualify for. The average home buyer receives $11,565 as down payment assistance.

Are there grants for buyers? 

Every state offers home buyer grants, and all buyers can apply. They are referred to as down payment assistance programs (DPA). These programs are widely available but many buyers don’t use them. 10% of buyers apply for these programs, while 87% of single-family homes qualify. The mortgage lender can help you determine the right DPAs for you.

What are the requirements for an FHA loan? 

The requirements for an FHA loan are:

  1. At least a 500 credit score
  2. Income can be verified using pay stubs and W-2 statements, or federal tax returns
  3. Not delinquent on federal student loans, federal taxes, and other federal debt
  4. No history of foreclosure, bankruptcy, or short sale in the last 12 months
  5. The home that you want to buy has to be the primary residence and doesn’t exceed the loan limits set by FHA

Are there benefits of putting more down payment?

Just like there are some benefits of no or low-down-payment mortgages, there are also benefits of putting more. When you put more, the amount you are going to need to borrow is going to be less, this lowers your monthly payments. If the mortgage requires insurance, it is going to be removed faster compared to low down payment.

Do I pay mortgage insurance when I make a low down payment? 

When you choose a no or low-down-payment option, then there is a higher chance of paying for insurance, but it is not always the case. The VA Home Loan Guaranty program doesn’t require mortgage insurance. If you choose this option, then it won’t matter even if you make a low down payment. USDA and FHA loans always have mortgage insurance so even if you were to make a large down payment, you still have to pay monthly mortgage insurance. 

The only option that your down payment affects your insurance is the conventional mortgage. The smaller the down payment, the higher the mortgage insurance. When you have 20% equity in your home, then mortgage insurance is going to be removed.

What are my lender fees with a low down payment? 

The down payment is not going to affect your lender fees. No matter how small or large the down payment is, the lender fees are going to be the same. This is because mortgage lenders aren’t allowed to charge higher fees based on the down payment. You should keep in mind that different loan options have different requirements. Some will require more services (e.g. roof inspection, home inspection, home appraisal), which will increase the closing costs.

What is the minimum down payment?

 The minimum by program are:

  • USDA loan: 0%
  • VA loan: 0% down payment
  • HomeReady mortgage: 3% down payment
  • Conventional 97 mortgage: 3% down payment
  • FHA loan: 3.5% down payment

There are also down payment assistance programs in addition to these programs. Payment assistance programs provide $11,000 on average to home buyers.

Are there no-down mortgage loans? 

There are zero-down mortgages where they finance 100% and they are offered by the Department of Veteran Affairs (VA loan) and the U.S. Department of Agriculture (Rural Housing loan or USDA loan). There are low-down-payment options such as the conventional 97% (3% down payment), FHA loan (3.5% down payment), and HomeReady mortgage (3% down payment).

How can a down payment be funded? 

There are many ways of funding a down payment, and lenders tend to be flexible. Some common ways of funding a down payment include checking or saving account, or for repeat buyers, proceeds from selling a home.

There are other ways of funding a down payment. A buyer can borrow from their IRA or 401k (this might not be the best idea) or receive a cash gift for their down payment. You can fund a down payment using a down payment assistance program. Many of the payment assistance programs grant or loan money to buyers stipulate that they have to live in the home for a given number of years – this tends to be 5 years or less.

No matter how you fund it, you need to ensure there is a paper trail. A mortgage lender might not allow you to use the money if there is no clear account of the source of that money. 

How much home can I afford? 

This is a personal question, and you shouldn’t leave it to the lender alone. You also have to look at some factors on your side.

If you want an answer to the question, then it is better to rephrase it and ask yourself how much you can afford for a home. Look at your monthly budget and see how much you can comfortably pay each month for a home. Once you know how much you can make in monthly payments, use a mortgage calculator and work backward to find out the maximum home purchase price you can be comfortable with.

Keep in mind that the mortgage rates today are going to affect the calculation, which is why you need to ensure current mortgage rates are used when calculating. When these rates change, home affordability changes too.