Low down-payment loans have been around much longer than most people realize. 2008 was the re-emergence of the FHA, only requiring 3.5% down. Today loans backed by the government requiring even less down are becoming popular. Here’s what you need to know if you’re working with a low down-payment loan to purchase a home…
Low down-payment loan options consumers can choose from include the following:
FHA – A loan that is insured by the federal government which requires just a 3.5% down payment and is incredibly flexible on financial history, credit history, and debt-to-income ratios. It is the most widely known low down payment program available in the market, is incredibly popular, and is virtually limitless in terms of property, income and location.
Conventional – A loan that requires 5% down, and in some cases as little as 3% down based on the per capita income in the area in which the property is located.
USDA – Requires no down payment whatsoever and has income limitations and specific area locations. The program is only available in certain areas that are deemed agricultural by the US department of agriculture.
VA – The US Department of Veterans Affairs guarantees loans for up to 100% loan-to-value with absolutely no money down. Hands-down, the best program by far in the low down-payment arena. The program is for US military veterans only and their spouses.
Down payment assistance – A state specific program that does have income limitations where you could put in as little as $500 to purchase a home. For example, in the state of California, a grant is provided for up to 5% of the loan amount which can go towards the down payment and closing costs.
1% loans – Other lenders are starting to emerge offering as little as 1% and even no money down loans with grants that need not be repaid. These loans are backed by Fannie Mae, and the lender bears the risk. You can bank on income limitations and needing good credit scores for such programs.
Three ingredients for making a loan include cash for the down payment and or reserves, credit and income. Each item balances with the other. In other words, you must have an equal share of each to maximize your borrowing power. Unlike 10 years ago in the mortgage market heyday where the products were driving housing prices, the tables have turned and the pendulum has swung and this real estate market is a property problem market, not loan problem market. In other words, while the loan program that you select is important, the main factor is focusing on getting into contract. The loan program is a catalyst to help you do that and the better loan program you have, and the more down payment you have the better your chances of getting into contract.
A low down-payment loan can very easily help bridge the gap between renting and homeownership, and most of the low down-payment loan programs available in the marketplace today, except for FHA and a traditional 5% down conventional loan, have income limitations. Income limitations mean your borrowing power in a certain geographic area is limited. Whereas, if you could use a 3.5% down FHA loan or a 5% down conventional, for example, your odds of getting into contract would be far greater because your borrowing power would be kicked up a couple of notches.
Here is some homework to consider:
Do you have a down payment? If yes, where did those funds specifically come from? Have you talked to all your family about the possibility of getting a gift funds for a down payment? You might be surprised by how generous your family could be.
If your down payment funds are very limited, get an honest answer from your real estate agent and lender about your ability to perform in this marketplace and what it would take to make you stronger on paper.
Get your financial house in order. That means compiling your recent W-2s, paystubs, and bank statements so you have enough information to provide to a lender.
Do not accept a lender giving you just a prequalification letter. You want to be preapproved. Any lender that will not give you a preapproval letter, is a lender that is more concerned about their policies than they are getting you into a home.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.