Updated For 2014 : Common Mortgages Which Don’t Require 20% Downpayment
The 2014 U.S. housing market is starting strong for buyers and sellers.
Fixed- and adjustable-rate mortgage rates are dropping, which helps to hold mortgage payments low for buyers; and, demand for homes is outweighing supply, which helps to elevate home values for sellers.
However, because falling mortgage rates affect home affordability more than rising home prices, buyers may be gaining ground. Even better for buyers -- there are still plenty of ways to finance a home with little or no money down.
Home Buyers Don't Need To Put 20% Down
Buyers in today's U.S. housing market don't need 20 percent down. Yet, many believe they do. This "20 Percent Down" misbelief may have true at some point in history, but not since the advent of the FHA-backed loan in 1934, which was 80 years ago.
The likely reason why buyers believe a twenty percent downpayment is required is because, with a conventional mortgage, putting twenty percent down removes the need for private mortgage insurance.
Private mortgage insurance is an insurance policy homeowners are required to pay in order to protect a lender in the event of default. Mortgage insurance costs vary by downpayment, state, and the borrower's credit score.
Home buyers -- especially first-time home buyers -- will sometimes delay a purchase because they don't feel as if they have enough money saved up for downpayment. And, while this should certainly be a consideration in homeownership, it should never be the only consideration.
Home affordability is not about how much money you can put down on a home. Home affordability is about whether you can afford the monthly payments that come with owning a home.
A larger downpayment will result in a smaller loan size and, therefore, a smaller monthly mortgage payment. However, if you've depleted your life savings to make the purchase, perhaps the big downpayment was poor planning.
Financial experts call this being "house-poor". When you're house-poor, you have little money left to handle the everyday emergencies of life (and of homeowners).
Making a downpayment of less than 20% can be financially conservative, in this way.
FHA Mortgage : 3.5% Downpayment
The FHA mortgage is somewhat of a misnomer because the FHA doesn't actually make loans. Rather, the FHA is an insurer of loans.
The FHA publishes a series of standards for the loans it will insure. When a bank underwrites and funds a loan which meets these specific guidelines, the FHA agrees to insure that loan against loss.
FHA mortgage guidelines are famous for their liberal approach to credit scores and downpayments. The FHA will typically insure a home loan for borrowers with low credit scores so long as there's a reasonable explanation for the low FICO.
The FHA allows a downpayment of just 3.5 percent in all U.S. markets.
Other traits of an FHA include :
- Your downpayment may consist entirely from "gift funds"
- Your credit score requirement is 500
- Mortgage insurance premiums paid upfront at closing, and monthly thereafter
Furthermore, the FHA supports homeowners who have experienced recent short sales, foreclosures or bankruptcies through the agency's Back to Work program.
The FHA insures loan sizes up to $625,500 in designated "high-cost" areas nationwide. High-cost areas include Orange County, California; the Washington D.C. metro area; and, New York City's 5 boroughs.
Conventional 97 : 3% Downpayment
Editor's Note : The Conventional 97 program was discontinued in December 2013. This section will not be deleted for archival purposes.
The Conventional 97 program is available from Fannie Mae. It's a 3 percent downpayment program and, for many home buyers, it's a less-expensive option as compared to an FHA loan.
Furthermore, the Conventional 97 mortgage allows for its entire three percent downpayment to come from gifted funds, so long as the gifter is related by blood or marriage; or via legal guardianship or domestic partnership; or is a fiance/fiancee.
The Conventional 97 basic qualification standards include :
- Loan size may not exceed $417,000, even if the home is in a high-cost market.
- The subject property must be a single-unit dwelling. No multi-unit homes are allowed.
- The mortgage must be a fixed rate mortgage. No ARMs via the Conventional 97.
In addition, the Conventional 97 program enforces a minimum credit score on all borrowers of 680. If a gift of downpayment is accepted, though, the minimum credit score threshold rises to 740.
VA Mortgage : No Money Down
The VA mortgage is a no-money-down program available to members of the U.S. military and surviving spouses.
Guaranteed by the U.S. Department of Veteran Affairs, VA loans are similar to FHA loans in that the agency guarantees repayment to lenders making loans which means VA mortgage guidelines.
VA loan qualification are straight-forward.
In general, active duty and honorably discharged service personnel are eligible for the VA program. In addition, home buyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of service members killed in the line of duty.
Some key traits of the VA loan include :
- You may use intermittent occupancy
- Bankruptcy and other derogatory credit do not immediately disqualify you
- No mortgage insurance is required
VA loans also allow for loan sizes of up to $1,094,625 in high-cost areas. This can be helpful in areas such as San Francisco, California; and Honolulu, Hawaii which are home to U.S. military bases.
USDA Mortgage : 100% Financing
No Money Down options exist for non-military borrowers, too. The U.S. Department of Agriculture offers a 100% mortgage, too. The program is formally known as a Section 502 mortgage, but, more commonly, it's called a Rural Housing Loan.
The good news about the USDA Rural Housing Loan is that it's not just a "rural loan" -- it's available to buyers in suburban neighborhoods, too. The USDA's goal is to reach "low-to-moderate income homebuyers", wherever they may be.
Many borrowers using the USDA Single Family Housing Guaranteed Loan Program make a good living and reside in neighborhoods which don't meet the traditional definition of rural.
For example, college towns including Christiansburg, Virginia; State College, Pennsylvania; and even suburbs of Columbus, Ohio meet USDA eligibility standards. So do the less-populated suburbs of some major U.S. cities.
Some key traits of the USDA loan include :
- You may include eligible home repairs and improvements in your loan size
- There is maximum home purchase price
- Guarantee fee added to loan balance at closing; mortgage insurance collected monthly
Another key benefit is that USDA mortgage rates are often lower than rates for comparable, low- or no-downpayment mortgages. Financing a home via the USDA can be the lowest cost means of homeownership.
Home Buyers Get Low Mortgage Rates
Not everyone will be eligible for today's low-downpayment loans, which is okay. The next-lowest downpayment loan comes from Fannie Mae and Freddie Mac and it requires just five percent down.
2014 will be a big year for buyers. See how today's low rates and low-downpayment loans fit your budget. And, consider getting a no-obligation pre-approval for your purchase.
Personalized rate quotes are available online, at no cost whatsoever.