Best Low Downpayment Home Loans

Owning your own home is an excellent way to create a solid financial foundation and connect with your community. However, it can be difficult to save up a 20% down payment for a conventional mortgage, especially if you have a lower income or less-than-perfect credit or you are buying your first home.

Explore Mortgage Options With a Low Down Payment

Conventional mortgages require a good credit score and a 20% down payment to acquire a competitive interest rate. This is only one type of mortgage loan, though, and a shortage of savings does not prevent you from securing a mortgage with a good rate.

There are excellent loan options available for people who can only afford little or no down payment.

VA Loan

If you are a veteran or the surviving spouse of a veteran of any of the armed services of the United States, a VA loan is probably going to provide you the best terms and most competitive rates, with or without a down payment.

VA loans require 0% down, offer comparable rates to a conventional mortgage, and require no mortgage insurance. These terms represent significant advantages over other mortgages. If you qualify for a VA loan, this will be your first and likely best option.

VA mortgage loans are a lifetime benefit and can be used more than once. These loans are issued by regular banks, not the Veterans' Administration, but the VA guarantees a portion of the mortgage, making the risk for the bank lower and allowing them to offer you more favorable terms.

FHA Loan

An FHA loan is another government-backed mortgage loan program, but for this one you do not need to be a veteran to qualify. The Federal Housing Authority insures the loan in case a borrower defaults on payments, in much the same way that the VA ensures payment for a VA loan.

Minimum Down Payment

FHA loans require a down payment of at least 3.5% and generally offer competitive interest rates. An FHA loan can only be used to purchase a primary residence, not an investment or vacation property.

MIP Payments

Unlike a VA loan, FHA loans do require mortgage insurance premiums. This insurance is divided into two separate payments. The first part of MIP for an FHA loan is 1.75% of the loan amount and is paid upfront as part of closing costs. Alternatively, this portion of the insurance may be rolled into the borrowed amount and spread over the life of the loan.

The second part of MIP is an annual payment, usually 0.85% of the borrowed amount. This cost is divided into 12 equal monthly premium payments and paid along with your regular mortgage each month.

If you put down less than 10% on an FHA loan, MIP payments continue for the life of the loan. If you are able to put down 10% or more, these payments end after 11 years.

Home Ready Loan

This loan program through Fannie Mae allows buyers to purchase a home with as little as 3% down and has more flexible terms about where the down payment and income funds originate.

Gift Cash for Down Payment

With a HomeReady loan, cash gifts can be qualifying funds for a down payment. This could mean, for example, that a newly married couple could apply wedding cash gifts to their down payment. In contrast, a conventional mortgage requires that down payment funds be verified.

Non-resident Co-signers

These mortgages allow co-signers on the loan to live in another location, so a parent or grandparent could co-sign the mortgage. A co-signer can help qualify a buyer who has little or no credit history or whose income doesn't cover the requirements to borrow. Other low-down-payment loans require co-signers to live in the home being purchased.

Rental Proceeds as Qualifying Income

If the property being mortgaged can be rented, the buyer can use the potential income from renting space in the building towards monthly income to qualify for the loan. This is an unusual but very practical advantage, especially for first-time or low-income borrowers who are ready to own but who plan to share the space and expenses of their new home with renters.

Home Possible Program

This program is similar to HomeReady, but it is through Freddie Mac rather than Fannie Mae. The Home Possible program is focused on lower-income buyers, so there are income limits to qualify. Similar to the HomeReady program, gift money can be used towards the down payment and buyers are only required to put 3% down.

With both HomeReady and Home Possible mortgages, borrowers are required to pay private mortgage inurance until they have accumulated 20% equity in the property. Similar to FHA loans, these mortgages are only for a primary residence, not for investment or vacation properties.

USDA Loan

If you're looking at a rural property, a USDA loan might be a good option for you. This is another government-guaranteed loan program. A USDA mortgage requires 0% down payment. Because of the USDA guarantee, banks can offer you favorable rates and terms even without any money down.

The property you purchase must also qualify for the program, however, and there are income limits as well. Income and property eligibility requirements for a USDA loan vary by state and county.

Conventional 97

If you have good or excellent credit, you can often secure a conventional mortgage with a low down payment. If you put 3% down, the loan is called a Conventional 97, because you are financing 97% of the value of the property.

You can usually expect to pay a higher interest rate than with an FHA loan, but you will not be required to pay MIP insurance. When you have accrued 20% equity in the property, you will be able to eliminate private mortgage insurance payments, as with other conventional mortgages.

Choose a Low-Down-Payment Mortgage

There are mortgage options for a variety of borrowers and financial situations. Only having a low down payment on hand shouldn't keep you from investing in a home. At FHA Insider, we can help you understand all the options available so you can select the best mortgage for your circumstances.

Get in touch with us today and find out which low-down-payment mortgage loans will suit your needs and help you purchase your own home.