Buying A Home With Less Than 20% Down
Buying a home can be intimidating, more so if you are going to the dance for the first time and are unfamiliar with the process. Often, prospective homebuyers believe that a 20% down payment is required to buy a home. I want to affirm that that is not the case. In this article I will share with you the most popular programs available that may allow you to purchase your home with as little as 3% down.
Additionally, there are specific first-time homebuyer programs, grants, and some targeted programs that may be ideal for your situation. Before seeking out first-time homebuyer programs, it’s crucial that you make sure you meet the definition of a first-time homebuyer. Many nonprofit and government programs consider you a first-time home buyer if you haven’t owned a home within the last three years.
Creating you budget
Regardless of which programs you may qualify for, purchasing a home is a major financial decision and shouldn’t be taken lightly. That means being honest with yourself, your real estate agent, and your mortgage lender is key. You don’t want to wind up with a house you can’t afford. Do a thorough accounting of your own finances and establish a realistic budget to determine how much you’ll really be able to lay out every month for your new home.
Finding a lender
Once you figure out a realistic budget, speak to a reputable lender that is knowledgeable about first-time homebuyer programs. Good lenders have ample knowledge about first-time homebuyer programs in your area and knowing what you might qualify for can save you thousands of dollars in the long run.
Shopping around and choosing a mortgage lender is one of the most important parts of getting a mortgage. You want to make sure you’re getting the best possible deal, so be sure to compare all the terms each lender is offering, including the APR, not just the interest rate. Preapprovals (best to get two) are a must as it demonstrates to the sellers that you’re a qualified and a serious buyer.
Selecting your Realtor
Working with the right real estate agent is critical and selecting one who is knowledgeable about the area you plan to buy in will be a big help in your search. You want an agent who can help you find the right home, negotiate the best offer, and recommend other professionals for any projects you want to do once you move in.
1. FHA loan
Insured by the Federal Housing Administration, FHA Loans typically come with a smaller down payment and lower credit score requirements than most conventional loans. First-time homebuyers can buy a home with a minimum credit score of 580 and as little as 3.5 percent down, or a credit score of 500 to 579 with at least 10% down.
2. Fannie Mae or Freddie Mac
The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac set borrowing guidelines for loans they’re willing to buy from conventional lenders on the secondary mortgage market.
Both programs require a minimum 3% down payment. To qualify, homebuyers need a minimum credit score of 620 (though some lenders have different thresholds) and a relatively unblemished financial and credit history. Fannie Mae accepts a debt-to-income ratio as high as 50% in some cases.
You’ll need to pay for private mortgage insurance, or PMI, if you’re putting less than 20% down, but you can get it cancelled once your loan-to-value ratio drops below 80%.
3. Fannie Mae’s HomePath Ready Buyer Program
Fannie Mae’s HomePath ReadyBuyer program is geared toward first-time buyers interested in foreclosed homes that are owned by Fannie Mae. After taking a required online homebuying education course, eligible borrowers can receive up to 3% in closing cost assistance toward the purchase of a HomePath property.
The trick is finding a HomePath property in your market, which might be a challenge since foreclosures typically account for only a small chunk of listings.
4. VA loan
Qualified U.S. military members (active duty, veterans, and eligible family members) can apply for loans backed by the U.S. Department of Veterans Affairs, or VA.
VA loans are a great deal because they come with lower interest rates compared to most other loan types and don’t require a down payment. Borrowers, however, will need to pay a funding fee that is required on VA loans, but it can be rolled into your monthly loan costs. Some service members may be exempt from paying the fee.
Other VA loan perks include no minimum credit score or mortgage insurance requirements. The VA can negotiate with the lender on your behalf if you find yourself struggling to keep up with mortgage payments.
5. FHA Section 203(k)
If you’re brave enough to take on a fixer-upper but don’t have the extra money to pay for renovations, an FHA Section 203(k) loan is worth consideration.
Backed by the FHA, the loan calculates the home’s value after improvements have been made. You can then borrow funds needed to pay for home improvement projects and roll the costs into one loan.
Improvements must cost more than $5,000 and you’ll need to make a minimum 3.5% down payment. You’ll also want to make sure you’re working with a contractor who is familiar with 203(k) loans and their timeline.
6. Energy-efficient mortgage (EEM)
Making “green” upgrades can be costly, but you can get an energy-efficient mortgage (EEM) loan that’s insured through the FHA or VA programs.
An EEM loan lets you tack the cost of energy-efficient upgrades (think new insulation, a more efficient HVAC system or double-pane windows) onto your primary loan, without requiring a larger down payment.
Lastly, it may be worthwhile to check available programs locally and in your home state. For example, the California Housing Finance Agency provides educational programs and creative solutions so more Californians have a place to call home.
