If you’re buying your next home, typically the proceeds from the sale will make up part or all of your down payment. But if you don’t own a home then you’ll need to think about your down payment and closing costs. The most popular loan choice in today’s marketplace is the conforming, 30 year fixed rate loan.
Whether the loan is one underwritten to Fannie Mae or Freddie Mac standards, it’s by far the first choice among home buyers and for those refinancing their current mortgage. Fannie and Freddie both require a down payment, as do most mortgage programs but there are some options both with Fannie and Freddie and without. The good news is these days you typically don’t have to put down 20 percent to buy a home.
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FHA- The Federal Housing Administration first introduced this program back in 1934 as one of the ways Congress was trying to get the economy back on its feet after the Great Depression. Today, it’s the mortgage of choice for first-time buyers primarily due to the low down payment needed. The FHA loan asks for a down payment of just 3.5% of the sales price of the home. In addition, the down payment, as well as closing costs, can be paid for by a financial gift from a family member or qualified non-profit.
The FHA loan can be used to finance a primary residence only and is not to be used to finance a second home, vacation home or rental investment property. Credit guidelines for FHA loans are also somewhat relaxed, especially when compared to lower down payment conventional options.
VA- One way to reduce the amount needed for a down payment is to get a loan that doesn’t need a down payment at all. The VA home loan doesn’t require a down payment and also limits the types of closing costs the buyers are permitted to pay.
To determine who is eligible for this loan program, buyers must get a copy of their Certificate of Eligibility from the VA. They can visit the nearest regional VA center or fax or mail a request. However, certain lenders are approved by the VA to have access to the Automated Certificate of Eligibility, or ACE, which can obtain the certificate on behalf of the buyers almost instantly.
USDA- The next 100% home loan is the USDA Rural Housing mortgage. This is also a secure fix rate Government-backed loan like the FHA and VA. This program is designed to help buyers finance homes in rural areas with no money down.
In addition to the property location, the USDA loan limits the amount of household income in order to qualify. These income limits are set at 115% of the median household income for the area. If you’re thinking of buying a home in a rural or semi-rural area and want to come to the closing table with as little cash as possible, the USDA loan should be on your list. Learn more about USDA Loan Eligibility here.
Conventional with PMI- You don’t need 20 percent down to get a conventional loan but if you put less money down then private mortgage insurance or PMI may be required. For example, you can make a 5% down payment with a conventional mortgage but the PMI payment will add to the cost. When obtaining a conventional loan and you want a lower down payment less than 20 percent, compare this structure with the 80-10-10 and 80-15-5 options.
80-10-10 and 80-15-5- This is a combination of two conventional loans, with the first mortgage being at 80 percent of the value of the home. Keeping the first mortgage at this level eliminates the need for private mortgage insurance. The first mortgage is followed up with a second, subordinate loan to make up for the difference between the 80 percent mark and the amount of down payment. With a 10 percent down payment, the second mortgage would then be at 10 percent of the value of the home. With a 5.0 percent down payment, the second mortgage would be 15 percent of the value of the home.
These two options work for both conforming and jumbo loan programs. The current conforming mortgage limit for most locations is $453,100, excluding higher cost counties in California, Florida, Colorado, Hawaii, DC and the North East that permit larger loan amounts near 700K. Any mortgage amount that exceeds the conventional limit is considered a Jumbo loan.
Contact us today to learn more about your options. We are happy to assist home buyers nationwide including Los Angeles, Houston, Sante Fe, Honolulu, Boston, Pittsburg, Little Rock, Kansas City, Salt Lake City.