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Guide To Low Down Payment Mortgages

February 1st, 2018 7:12 AM by Jackie A. Graves, President

In the years leading up to mid-2007, it was easy to buy a house with no money down as “zero down mortgages” and “100 percent financing home loans” were the primary driver of the mortgage market.

These loans were also the primary driver of the global financial crisis because many were made without properly analyzing and documenting a borrower’s ability to repay the loan.

Now the housing market is more stable, very strict laws are in place to require lenders to prove a borrower’s ability to repay, and many low down payment mortgage options are again available for borrowers.

Let’s review some of the options. In all cases, you can expect that your loan approval process will be very strict, and you’ll have to submit detailed personal, residence, and employment history as well as detailed documentation on housing costs, employment, income, assets, and debts.

According to federal law, lenders must prove to regulators that they followed eight loan approval factors to ensure they properly verified your ability to repay the loan.

Fannie Mae & Freddie Mac 3 percent down

Fannie Mae and Freddie Mac aren’t lenders, but they buy loans from lenders to help ensure that lenders can keep making loans. This helps lenders take more risk on creditworthy borrowers who might be light on cash.

One Fannie/Freddie program many lenders use is a loan that allows first time buyers — or buyers who haven’t owned a home in the past three years — to put just 3 percent down on loans up to $417,000, which equates to a home purchase price up to $430,000.

The down payment can come from family gift funds or your own money, and you must live in the home you’re buying and pay mortgage insurance on the loan. The mortgage insurance can be cancelled once you achieve 22-percent equity in the home by paying your loan down.

FHA 3.5 percent down

Like Fannie and Freddie, the Federal Housing Administration doesn’t make loans, but rather guarantees them for lenders, which makes lenders more willing to take risk on lower down payment borrowers.

With an FHA loan, you can get a loan with 3.5 percent down and it will require more expensive mortgage insurance than that of the Fannie and Freddie programs, but the qualification guidelines are often less stringent, especially when it comes to required reserves left over after the close.  Read more details on FHA mortgage insurance.

FHA loans were the most popular low-down loan immediately after the crisis, but other options continue emerging that are more beneficial for borrowers, and less risky for lenders.

VA 100 percent financing

Once again, the Veteran’s Administration (VA) doesn’t make loans, but guarantees them for lenders, which makes lenders more willing to take risk on lower down payment borrowers.

In the case of VA loans, you can get financing for up to 100 percent of a home’s value with no mortgage insurance. The national loan limit is $417,000, but can go up to $1,000,000 in high-cost areas. VA loan limits for your area are available on the VA site, and a VA lender can also give you local VA loan limits.

VA loans also let you finance most of your closing costs, including appraisal, credit report, title insurance, lender origination fee, recording fees, and survey fees. These represent the bulk of the closing costs in most home purchase transactions.

The catch, of course, is that you have to be a person (or family member of someone) who has served or is presently serving in the U.S. military. Read more to see if you qualify.

New one-percent down programs

Now the mortgage industry is starting to see one percent-down mortgages emerge, with QuickenLoans leading the way on this new product as of June 2016 by enhancing the Fannie/Freddie three-percent down programs with their own guidelines.

With this program, you must have a credit score of at least 680 and earn less than the median income for your area. If so, then you might qualify to receive a lender grant for the other two percent so you start ownership with three-percent equity even though you only put down one percent.

You need to go through a full qualification process and take a course to determine your eligibility.

How to find low down payment programs

All low-down programs have a lot of fine print, so the only way to determine if you qualify is to complete a full profile with a lender. You can have an initial conversation with a lender to determine basic eligibility, but because the loan approval guidelines are so strict for all of these programs, it’s a good idea to find a local lender and get pre-approved to see what types of loans you qualify for.

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