Once upon a time, American homebuyers were advised to put down a 20-percent down payment. With today’s mix of stagnant salaries, student loans, and higher living costs, the type of dedicated saving this requires is downright intimidating. As Business Insider points out, a typical renter residing in Los Angeles, California, would need to tuck away a full 20 percent of their income for 9 years and 10 months in order to save up the $143,400 that they’d need to make a 20-percent down payment for the median home price of $717,000. That’s nearly a decade of pinching pennies and waiting, and that doesn’t even include anything for closing costs. Fortunately, there’s another option for those who don’t want to wait. Home loans with no down payment offer 100-percent financing and allow people to make the jump from renting to buying sooner rather than later.
Home Loans with No Down Payment
If you know where to look, home loans with no down payment are out there. There are also a few options for home loans with low down payments.
The U.S. Department of Agriculture (USDA) Rural Development’s Section 502 Guaranteed Loan Program offers home loans with 100-percent financing to help low- and moderate-income homebuyers. Known as USDA loans, they’re intended to help people purchase safe, sanitary housing in eligible rural areas. However, the USDA’s definition of rural is decidedly loose. Under current guidelines, only properties in the heart of the city are likely to be rejected on the basis of geography. There are other requirements, however. For example, borrowers must plan to make the home their primary residence, and their income must be no more than 115 percent of the median household income for the area. In addition, they must be U.S. citizens, U.S. non-citizen nationals, or qualified aliens.
With VA loans, the home loan program of the U.S. Department of Veterans Affairs (VA) sets the basic rules and offers a guarantee that helps to offset the lender’s risk. Private lenders add some underwriting of their own and make the actual loans. It’s a joint effort that allows eligible service members and veterans to secure home loans with some attractive perks. No down payment is required. Interest rates are competitive, and loan terms are favorable. Plus, while applicants do have to qualify for their loans, qualification standards are relaxed. No mortgage insurance is required, and closing costs are limited. In addition, borrowers who run into financial trouble making their mortgage payments can reach out to the VA for assistance.
FHA loans do require a small down payment. You’ll need to come up with at least 3.5 percent of the purchase price. Although that is more than zero, it’s certainly a lot less than 20 percent. What if you get the money from a down payment grant program or as a gift from a family member or friend? As long as it’s properly documented, that’s fine with this form of financing. Like VA loans, FHA loans are issued by private lenders and insured in part by the government. In this case, it’s the Federal Housing Administration (FHA). Qualifying borrowers who have a credit score of at least 580 can secure a loan with a down payment of just 3.5 percent. Borrowers with a credit score between 500 and 579 will need a 10-percent down payment. All borrowers will need to pay FHA mortgage insurance along with their mortgage payment.
Fannie Mae’s HomeReady loans also require a small down payment. Low-income borrowers who have a credit score of 640 or better can qualify for a loan with a down payment as small as 3 percent. While there are income limits, there are no geographic restrictions, and the program is open to both novice and repeat buyers. Plus, the program’s required mortgage insurance is cancelable when you have enough home equity.
Conventional 97 Loans
The Conventional 97 program gets its name from the fact that it’s a conventional loan with a minimum down payment of just 3 percent. It’s designed for both first-time and repeat buyers, and it offers the chance to secure a fixed-rate loan with a 30-year term. Adjustable-rate loans aren’t available. In addition, Conventional 97 loans are intended for primary homes only, so they cannot be used to buy rental or vacation properties.
Which home loan is right for your needs? With a variety of loan products to choose from, PrimeLending of Denver can help you find the one that best suits your unique situation. Reach out today to talk with one of our loan experts.