Strict lending requirements and loans with down payments up to 20 percent have shut many potential homebuyers out of the market, but a handful of government programs and a few private options are available for eligible borrowers who can’t quite spare enough cash for a 20 percent down payment.
Being able to afford a down payment on a home is a major obstacle for many homebuyers, especially first-time homebuyers, across the country. However, there are several programs that are helping homebuyers purchase homes with small down payments or even no down payment at all. Some of these programs are restricted to certain populations of people or are carved out to help low-income borrowers, but others are more inclusive and may make home- ownership a possibility for potential homebuyers shut out of the market by high down payment requirements.
Agents can help clients and potential buyers navigate the homebuying process and offer important information that may just make the difference in whether or not they can purchase a particular home or any home at all.
Here are a few options for homebuyers looking for small down payment loans:
Federal Housing Administration
The FHA has long been the go-to program for first-time homebuyers, and the administration is still helping homebuyers purchase homes with as little as 3.5 percent down. Since the housing crisis and a slew of lawsuits regarding underwriting for FHA loans, large banks have shied away from the program, but some lenders are still offering FHA loans. According to Inside Mortgage Finance, Wells Fargo is the only “mainstream bank” writing FHA loans. Agents and homebuyers can search for FHA lenders at HUD.gov.
Veterans Affairs
The U.S. Department of Veterans affairs allows servicemembers, veterans, and surviving spouses to qualify for loans with little or no down payment. Homebuyers also often do not need mortgage insurance with VA loans. Visit Benefits.VA.gov for more information.
U.S. Department of Agriculture
The U.S. Department of Agriculture (USDA) offers assistance to homebuyers purchasing in specified, rural and nonmetro areas. These borrowers can obtain a mortgage loan with no down payment. Income limitations for USDA loans vary by regions. For more information on areas eligible for USDA-backed loans, visit the USDA website.
Good Neighbor Next Door
The Good Neighbor Next Door Program is available to teachers, law enforcement officials, firefighters, and emergency medical technicians, offering discounts of 50 percent of the list price of homes in revitalization areas.
Conventional 97
Fannie Mae and Freddie Mac offer conventional mortgage loans with down payments as little as 3 percent if the home will serve as the buyers’ primary residence and if the mortgage is a conventional loan— less than $417,000. This loan is designed for creditworthy borrowers who would qualify for a mortgage loan but are not able to make a large down payment.
Private Mortgage Insurance
While the FHA backs loans with as little as 3.5 percent down payments for borrowers with lower credit scores, private mortgage insurance is available to creditworthy borrowers and can help them obtain a loan with a down payment as little as 3 percent. Homeowners may discontinue their private mortgage insurance when they have paid their loan down to 80 percent of its original value if they remain current on their monthly mortgage payments.
Major Banks with Low Down Payment Loans
Two major banks are now offering low down payment loans for some homebuyers. In addition to writing FHA-insured loans, Wells Fargo began offering low down payment loans not insured by the FHA a few months ago. Borrowers with credit scores as low as 620 may receive loans with 3 percent down payments.
Bank of America partnered with Self Help Ventures Fund and Freddie Mac earlier this year to o er the Affordable Loan Solution, a conventional loan requiring as little as 3 percent down and allowing borrowers to use secondary financing. This loan product is eligible to borrowers whose incomes do not exceed the median income in their area. First-time buyers must participate in housing counseling under this program.
Piggyback Loans
Piggyback loans or second mortgages are currently growing in popularity, according to the New York Times. Borrowers obtain two separate mortgage loans to cover the cost of the home. These loans will still require a down payment, but they can cut down on the amount.