Cutting Down on a Mortgage Down Payment
As home prices and mortgage rates remain low, you may be considering the opportunity of becoming a first-time homebuyer. If so, don’t be discouraged by a perceived need to come up with a hefty down payment.
While it’s true the free-money days of the housing boom — when virtually anyone could get a mortgage with little or no money down — are long gone, there are still ways that qualified borrowers can get a mortgage with a small down payment. And qualifying may not be as difficult as you think. Here’s a look at some options. (Note that these options are not affected by the new mortgage rules recently issued by the Consumer Financial Protection Bureau.)
FHA Mortgage: The FHA is the first place most new homebuyers should look when contemplating a low down payment mortgage. The FHA requires a down payment of as little as 3.5%, and rates and credit requirements are fairly generous. The downside of an FHA mortgage is that the fees can add up. However, unlike a down payment, you can roll many of these fees into the loan so you’re paying it on a monthly basis over time rather than having to come up with it all at once.
VA Loans: Available to all active duty and honorably discharged members of the armed forces, a VA mortgage is the best deal around when it comes to home loans. It’s not only one of the few places where you can still get a mortgage with no money down, there’s also no requirement for mortgage insurance as that cost is picked up by the U.S. government. In addition, interest rates tend to run lower than on conventional mortgages because the government is taking on part of the risk. You do have to pay a funding fee (usually in the neighborhood of 2% of the loan amount) if you elect to take out a VA mortgage with no money down, but that fee can be rolled into the loan amount so you don’t have to pay it upfront. You can avoid funding fees entirely by making a down payment of at least 3.5%.
USDA mortgage: This obscure mortgage product is offered through the U.S. Department of Agriculture’s Office of Rural Development, and if you don’t have a military connection it may be your best bet for a mortgage with little or no down payment. Technically they can only be used to buy a home in a rural area, but the definition of “rural” is broad and includes many communities that you would consider suburbs. These are only available to people with low to moderate incomes (generally defined as 115% of your local median income or less), and to qualify you must be without adequate housing at the present time — although that can simply mean your family has outgrown your present dwelling. The loan maximums are lower than FHA or VA mortgages, but are adequate for buying a good starter home in a decent neighborhood. Borrowers pay an upfront guarantee fee that can be rolled into the loan amount, and there is an annual mortgage insurance fee which is billed monthly as part of the mortgage statement.
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