Whether you are a first-time homebuyer or a move-up buyer, you may want to put down as little as possible. On the one hand, some people like to put down 20% when they can because it eliminates the need for mortgage insurance. On the other hand, the more money you put down, the less you have for investing in other things which 1) allows you to diversify your investment portfolio – yes, your principal residence is also and investment, and 2) gives you more assets to grow your investment portfolio. The bigger the down payment (especially beyond 20%), the lower your return on investment (ROI) on the property you are purchasing and, as mentioned above, the less you have for investing in other things (or to buy furniture and other things for your house without going into debt).
With that said, here are some mortgages that you might want to consider that will allow you to finance your home with little to no money down with very few restrictions. Depending on your area, there may also be some down-payment assistance programs specific to your area (I’m licensed in Utah, Nevada, and Tennessee so feel free to contact me regarding those areas) which you may want to look into in addition to the programs I’ll discuss if none of these fit your needs.
This is my absolute favorite loan. If you served in the military, national guard, or coast guard long enough to be eligible for a VA loan, this is a fantastic way to buy your first home or a move-up home. There is no down-payment (100% financing) requirement for loans that are in the conforming loan limit category. There also isn’t any monthly mortgage insurance. Rates are typically a bit lower than on conventional loans. VA loans have a funding fee which is currently 2.15% of the loan amount for first-time users and 3.3% for subsequent use loans – the borrower has an option to pay for this up front but most borrowers typically finance it into the loan. It is not a hard loan to do and VA loans typically close in the same time frame as conventional loans. Credit requirements for VA loans are somewhat flexible with no actual credit score requirement. Money for closing costs can come from a gift from a family member or the seller, Realtor, and / or lender can all contribute to help pay them.
VA Borrowers who are purchasing a home that is over the conforming loan limit might find the VA as a good alternative to jumbo loans since they can finance 100% of the loan up to the conforming loan limit and 75% of the amount over that limit. The current limit is $453,100 which means that if a borrower is purchasing a $503,100 home, they could finance $453,100 (100% of the conforming loan limit) + $37,500 (75% of the remaining $50,000) for a total of $490,600 (97.515% loan-to-value).
This loan was designed to serve people in rural communities although it is surprising sometimes to see what the federal government considers rural. This loan also allows for 100% financing, ie. no down payment. There is a funding fee of 1% of the loan amount which can be financed. There is also an annual fee of .35% with 1/12th paid monthly. There are income restrictions on this loan which vary by state and county, as well as size of the family. As for credit, count on having a minimum score of 640 but the requirements are somewhat flexible as far as the actual credit history. Additionally, the debt ratio requirements are 29%/41% which means that total mortgage payment including taxes and insurance can’t be more than 29% of the borrower’s gross income and that the total of all debt payments can’t be more than 41% of the gross income. There are exceptions to this based on compensating factors.
This is a very popular loan because there is no income or geographic restriction. A down payment of 3.5% is required but it can come in the form of a gift from a family member or an approved grant / down-payment assistance program. The seller, Realtor, or lender can also contribute towards closing costs just like VA, USDA, and conventional loans. It is meant more for first-time homebuyers, however, since the loan limit, which varies by county, is typically much lower than the conforming loan limit. That said, FHA is flexible with regard to credit and doesn’t require a borrower to have a credit score. Alternative credit (utility payments such as power, water, phone, etc.) can be used to establish a credit history. FHA also allows for higher debt ratios, often up to 50% of a borrower’s gross income. There is a 1.75% up-front mortgage insurance premium and a .85% annual premium which is divided into 12 even payments and paid monthly with the mortgage payment.
Conventional Loan Programs – CHECK THESE OUT!!
Most people don’t think of conventional loan programs as high LTV (loan-to-value) / low down-payment options. The truth is, 95% loans are very common and there are also conventional loans that finance up to 97% of the purchase price. Rates on conventional loans are driven by credit scores and, for the most part, it’s best to have a 720 or higher score in order to get the best rates. There are loan level pricing adjustments (LLPA) based on a number of things including credit score and the difference between a score in the 680-699 bucket to one over 720 can be 1-1.5 points which translates to .25% – .5% in rate.
HomeReady is a conventional loan program from Fannie Mae (FNMA) that waives all the loan level pricing adjustments if the borrower’s credit score is above 680 with a loan amount above 80% of the purchase price – this means that the borrower gets the best conventional rates available. For borrowers who’s credit score is below 680, the LLPA is capped at 1.5 points. This is a savings of up to 2.25 points. The great part about this program is that there are no geographic restrictions and the program basically follows conventional guidelines. There are some income restrictions based on census tract and they are either 100% of the median income or no income restriction at all – 31% of the census tracts nationwide have no income restriction. HomeReady also helps the borrower save more thanks to lower mortgage insurance premiums. The borrower is required to take an online homebuyer education course that takes about 2-3 hours and costs $75 but it’s a great loan and is one of my favorite.
HomePossible is very similar to HomeReady but has a few difference in that the homebuyer education course is free and it doesn’t allow for non-occupying co-borrowers. There are still income limitations but where they are aren’t exactly the same as HomeReady’s so it may be worth it to check both with regard to income eligibility. The other difference as compared to the HomeReady program is that the borrower(s) aren’t allowed to own any other real estate at the time of the closing (there are a couple of exceptions).
*BONUS: With either the HomeReady or the HomePossible program, we have been authorized to offer MortgageAssure which provides the borrower(s) protection against involuntary unemployment. This insurance is no cost to the borrower and will pay the borrower’s mortgage payment (up to $1,500) for 6 months (doesn’t have to be consecutive).
Down Payment Assistance
When talking about low-down payment loan programs, it seems logical to include information regarding down payment assistance programs (DPAs). A number of municipalities in Utah have down payment assistance programs with Utah County having the best one. Most of the various municipality DPAs are limited to amounts between $2,500 – $7,500 – while any help is better than no help, the amount of assistance offered will not typically cover the full down payment amount for starter homes in their areas. This means that buyers will have to make up the difference in down payment themselves in addition to having money for closing costs – Realtors are sometimes able to negotiate for the sellers to pay some of the closing costs and lenders (I do it quite frequently) and Realtors often chip in to help out when needed. The Utah County DPA program is more robust in that it will cover a 3.5% down payment for an FHA loan without a problem and it has some added benefits (contact me for all the details). DPAs are usually provided in the form of a 2nd mortgage that doesn’t require payments and has a 0% interest rates, also known as soft 2nds. These loans are either forgivable after a certain period of time (usually 3-5 years of on-time mortgage payments) or they are repaid upon the sale of the home.
The main challenges with most of the DPAs are the limitations – most are limited to 80% of the HUD Area Median Income (AMI) in addition to having geographical limitations. Most also require the buyer to be a 1st-time buyer – this means that the buyer hasn’t owned a home in the last 3 years. As of December 2019, we are able to offer a much broader reaching DPA that has an income limitation of 115% for soft 2nds but still allows incomes higher than the 115% threshold with a regular 2nd mortgage (current terms are 5% for 30 years). This is just one of the big advantages to this program. Another big advantage is that there is no geographical restriction. Finally, the program does not require the home buyer to be a 1st-time homebuyer. Hence, this program eliminates the challenges associated with the vast majority of DPAs.
Interest rates on the 1st mortgage using a DPA is higher than if you were to just get a stand-alone FHA. This is partly how the DPA is funded. Rates are typically about .25% – .75% higher than a normal FHA mortgage with most being .5% or less above the going FHA rate.