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Posted November 14, 2015
in About Mortgages

Low- and No-Downpayment Mortgage Programs Allowing Less Than 20% Downpayment

Today's home buyers have low and no downpayment options which don't require 20% downpayment

Low- And No-Downpayment Mortgages Available

2015 has been another strong year for U.S. housing, and 2016 is projecting to be the same. Home sales are rising, home supply is dropping, and prices are increasing in many cities and neighborhoods.

Furthermore, mortgage interest rates are down.

30-year mortgage rates are below 4% nationwide and are near their lowest levels of all-time. Buyers have close to ten percent more purchasing power as compared to last year.

However, for the majority of today's prospective home buyers, it's not the monthly payment of a mortgage which makes homeownership a challenge -- it's the prospect of having to put 20% down.

Buyers are earning good incomes these days, but few have much saved in the bank.

The good news is that there are a bevy of mortgage programs requiring little or no money down and they're available to the general public -- no hoops required.

Want to buy a home with little or nothing down? You can.

Click to see today's rates (Nov 25th, 2015)

Home Buyers Don't Need To Put 20% Down

Buyers in today's U.S. housing market don't need 20 percent down. However, many believe they do.

It's a common misconception that "20 Percent Down" is required to buy a home, and it may have true at some point in history, but certainly not since the advent of the FHA loan, which occurred in 1934.

The likely reason why buyers believe a 20% downpayment is required is because, with one specific mortgage type -- the conventional mortgage -- putting twenty percent down cancels the requirement to pay for private mortgage insurance.

Private mortgage insurance is neither good nor bad, but consumers seem to abhor it.

The purpose of private mortgage insurance is to protect the lender in the event of foreclosure -- that's all it's for. However, because it costs money, private mortgage insurance gets a bad rap.

It shouldn't.

Because of private mortgage insurance, home buyers can get mortgage-approved with less than 20 percent to put down and, eventually, private mortgage insurance can get removed.

Given the rate at which homes are currently increasing in value, for example, a home buyer with a 3% downpayment loan would be done with PMI in fewer than four years.

That's hardly terrible. Yet, home buyers -- especially first-time home buyers -- will often delay a home purchase because they want more money saved up for downpayment.

Meanwhile, home prices have been climbing.

Having a large downpayment should certainly be a consideration for homeownership, but it shouldn't be your only consideration. This is because 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 grant you a smaller loan size and, therefore, a smaller monthly mortgage payment. However, if you deplete your life savings to make that large downpayment, you're putting yourself at risk.

When the majority of your money is tied up in a home, financial experts refer to it as being "house-poor".

When you're house-poor, there's plenty of money "on-paper", but none of it available for the everyday emergencies of life. And, as every homeowner will tell you, emergencies happen.

A lot of people say it's financially-conservative to put 20% down on a home. However, if that 20 percent is everything you have, it could be argued that putting twenty percent down is the exact opposite of financially-conservative.

When you earn good income but have little saved, the financially-conservative option -- truly -- is to make a small downpayment instead.

Being house-poor is no way to live.

Click to see today's rates (Nov 25th, 2015)

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, with the exception of a few FHA approved condos.

Other traits of an FHA loan include :

  • Your downpayment may consist entirely from "gift funds"
  • Your credit score requirement is 500
  • Mortgage insurance premiums are 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.

Click to see today's rates (Nov 25th, 2015)

Conventional 97: 3% Downpayment

Editor's Note : The Conventional 97 program was originally discontinued in December 2013. It was later reinstated by the Federal Home Finance Agency in late-2014. This section has been updated to reflect the new product's guidelines.

The Conventional 97 program is available from Fannie Mae and Freddie Mac. 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.

The Conventional 97 program does not enforce a specific minimum credit score beyond those for a typical conventional home loan. The program can be used to refinance a home loan, too.

Editor's Note : The Conventional 97 program was originally discontinued in December 2013. It was later reinstated by the Federal Home Finance Agency in late-2014. This section has been updated to reflect the new product's guidelines.

VA Loan : No Money Down / 100% Financing

The VA loan 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.

Click to see today's rates (Nov 25th, 2015).

USDA Mortgage : No Money Down / 100% Financing

No Money Down options exist for non-military borrowers, too. The U.S. Department of Agriculture offers a 100% mortgage. 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.

80/10/10 : The "Piggyback Loan"

The 80/10/10 program is typically reserved for buyers with above-average credit scores. It's actually two loans, meant to give home buyers added flexibility and lower overall payments.

The beauty of the 80/10/10 is its structure.

With an 80/10/10 loan, buyers bring a ten percent downpayment to closing. This leaves ninety percent of the home sale price for the mortgage. But, instead of giving one mortgage for the 90%, the buyer splits the loan into parts.

The first part of the 80/10/10 is the "80".

The "80" represents the first mortgage and is a loan for 80% of the home's purchase price. This loan is typically a conventional loan via Fannie Mae or Freddie Mac; and it's offered at current market mortgage rates.

The first "10" represents the second mortgage and is a loan for 10% of the home's purchase price. This loan is typically a home equity loan (HELOAN) or home equity line of credit (HELOC).

Home equity loans are fixed-rate loans. Home equity line of credits are adjustable-rate loans. Buyers can choose from either option. HELOCs are more common because of the flexibility they offer over the long-term.

And that leaves the last "10", which represents the buyer's downpayment amount -- ten percent of the purchase price. This amount is paid as cash at closing.

80/10/10 loans are sometimes called piggyback mortgages because a second loan "piggybacks" on the first one to increase the total amount borrowed.

80/10/10 loans are meant to give buyers access to the best pricing available, so lenders may sometimes recommend an alternate structure. For example, for buyers of condos, a 75/15/10 is advised because condo mortgages get better rates with LTVs of 75% or less.

As another example, interest rates on HELOCs are sometimes better at larger loan sizes. Your lender may recommend that you increase the size of your HELOC, then, to lower your overall loan costs. The choice of your loan's structure, though, remains yours.

You can't be forced into borrowing more money on your second mortgage than makes you comfortable.

What Are Today's 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. That's a good low-downpayment option, too.

Take a look at today's real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

Click to see today's rates (Nov 25th, 2015)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2015 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)