Buying a Home with a Small Down Payment
Buying a home is a dream for many Americans, but most people think you need to save 20% of the cost of your new home to make a down payment. Potential homebuyers are often put off by this steep barrier to entry, but the savvy purchaser knows that you can buy a home with just a small down payment.
There are a lot of options to consider when purchasing a home, and the type of mortgage you want is one of them. While conventional wisdom says that you need a large down payment to buy a house, that is simply not the case. There are several types of mortgages available that offer terms that require little to no down payment. Even a conventional mortgage can be obtained without 20% down.
Each of these mortgages comes with different terms and may not be applicable to everyone. Still, there’s likely one that fits your needs and circumstances. Here we break down the different mortgages available to you without a huge down payment.
FHA Low Downpayment Mortgages
FHA loans were designed to offer mortgages to first time homebuyers who do not have equity built up in their homes to cover the cost of a large down payment. The Federal Housing Administration will back a loan with a down payment of only 3.5%. While an FHA loan gives you the opportunity to purchase a home with a low down-payment, it does come at a cost. Those that do not have 20% to put down on a home are required to purchase mortgage insurance, which guarantees that the lender will still get paid if you default on the loan.
This Mortgage Insurance Premium (MIP) is paid in two steps: A 1.75% upfront cost that can be rolled into the mortgage, and a monthly premium of .45% to 1.05% as well. Both of these premiums add to the total monthly cost of your payments, which needs to be taken into account when determining how much home you can buy.
Conventional Loans Can Have Low Down Payments Too
Conventional loans are not backed by any government entity and are by far the most popular type of loan today. A surprising fact for many potential homebuyers is that you can receive a conventional loan from a lender with less than a 20% down payment. You can get a conventional loan from a lender with as little as 5% down, though you’ll need to have pretty great credit in order to do so.
You’ll still have to pay mortgage insurance with a conventional loan in the form of private mortgage insurance, or PMI. The benefit of a conventional loan, however, is that there is no upfront payment for this insurance, just the monthly fee. Additionally, like Fannie Mae, once you reach 20% equity in your home, you can cancel PMI without having to completely refinance your loan.
The Fannie Mae HomeReady requires as little as 3% down and also comes with mortgage insurance. The benefit of Fannie Mae’s program is that your mortgage insurance payment is only required until you reach 20% equity in your home, unlike an FHA loan that requires you to pay the premium for the lifetime of the loan.
Mortgages with No Down Payment
While conventional loans and FHA loans are by far the most popular options, they require at least some down payment, even if it isn’t 20%. There are, however, some lesser-known mortgages available that actually require no down payment at all if you qualify. These include a VA loan and a USDA loan.
A VA loan is available only to retired or active duty members of the armed forces or a qualifying spouse, and is backed by the Veterans Administration. There are two main benefits to a VA loan that you don’t get with a conventional loan. The first is that there's no down payment required. The second is that you do not have to pay mortgage insurance even though there is no down payment.
Mortgages with No Down Payment
A USDA loan is similar to a VA loan in that it offers no down payment and does not require mortgage insurance. It is a private loan backed by the Department of Agriculture and is available to those in rural areas within strict geographic locations. The USDA provides a map to determine if your desired home is eligible for this type of loan. You may be surprised to find that many homes in more populated areas are actually eligible for this program.
The lack of a large down payment doesn’t have to hold you back from buying a house. There are plenty of loan options available to you depending on your circumstances. We’re happy to discuss these options with you and figure out which one is the perfect loan for you.
Learn more about MLD Mortgage, The Money Store in Florham Park, NJ.