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Low-down-payment mortgage options
These home loan programs don’t require a large down payment, but you have to meet certain qualifications.
Experts will tell you that saving at least 20% of your new home’s purchase price for a down payment can get you the strongest rates and terms on a mortgage. But for a lot of buyers, that just isn’t possible. And with so many mortgage options out there, it may not be necessary for you to land your dream home.
How small can my down payment be?
It depends on your lender and mortgage type. Most lenders require a down payment between 5% and 20%. Borrowers with low credit scores, or those purchasing expensive homes, generally have to put more down.
If you don’t have a down payment big enough for a conventional mortgage, you might qualify for a mortgage with a lower down payment through specific homebuying loans and programs.
For example, let’s say you have an average credit score and want to buy a $300,000 mortgage. A conventional mortgage with a lender that requires 10% down would need a down payment of at least $30,000. But an FHA loan would only require 3.5% down, or $10,500.
Low or 0% down payment mortgage options
These loan and private mortgage insurance options offer low down payments, but you’ll need to see what you qualify for first.
Insured by the Federal Housing Administration, FHA loans are designed for first-time homebuyers and those with low credit scores. They offer down payment options as low as 3.5% and require a minimum personal credit score of at least 580. If your credit score is between 500 and 579, you might still qualify with a down payment of 10%.
The FHA charges both an upfront mortgage insurance premium and an annual premium. The upfront insurance premium is a one-time payment of 1.75% of the total loan amount. The monthly annual premium is factored into your mortgage payment and ranges from 0.80% to 1.05%, depending on your loan term, total purchase amount and loan-to-value ratio.
Loans backed by the US Department of Veterans Affairs are designed for qualifying veterans, active-duty service members, members of the National Guard and Reserves and their families. VA loans offer up to 100% financing with no down payment required. To qualify for a VA loan, you must meet the basic service requirements of the VA.
The USDA offers a no-down-payment mortgage option through its Rural Development program. The loans are geographically limited to eligible areas as determined by the USDA.
USDA loans are designed for first-time home buyers. To qualify, you must meet the income limit for the county in which you live, which you can find on the USDA’s website. You must also be a permanent US resident with a steady income over the past 24 months and no bankruptcies or collections accounts on your credit history.
USDA home loans come with two fees: a 1% upfront guarantee fee that can be rolled into the total loan amount and a 0.35% annual guarantee fee.
Navy Federal Credit Union loans
The Navy Federal Credit Union offers financing of up to 100% for qualifying members. No down payment is helpful, but you’ll pay a funding fee of 1.75% for these loans. And you must be a member of the military, a civilian employee of the military, a member of the US Department of Defense or a family member.
What’s the catch?
If you borrow more than 80% of your property’s value as a mortgage, you may be required to pay private mortgage insurance (PMI) on top of your monthly repayment. PMI is designed to protect your lender if your mortgage ends up in default or your home ends up in foreclosure.
PMI can cost up to 1% of your total loan amount each year — which can easily add up to several thousand dollars a year.
After you’ve paid down your mortgage balance to 80% of your home’s original value, you can ask your lender to cancel your PMI.
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What if I still don’t have enough money for a down payment?
If you haven’t saved for a large down payment, these options can be useful to help you get the funds you need:
- Gifted down payment. If you have generous parents with cash in the bank, they may be able to gift you part of your down payment. How much of your down payment can be gifted depends on the type of loan you’re applying for. For instance, FHA loans often allow a fully gifted down payment for approval.
- Get a cosigner. If your parents own their home and are willing to cosign your mortgage, you may be able to borrow more without strong savings. With a cosigner, the bank secures your loan with the equity in your parents’ property. If you’re unable to repay your mortgage, however, your parents are at risk of losing their own homes.
- Existing property. If you already own a home in which you’ve built up equity, you may be able to secure a new mortgage with it. Depending on your lender and loan, you might be able to borrow up to 100% of the purchase price of your new property without savings.
Can I take out a personal loan for a down payment?
Yes. But depending on your financial circumstances, a personal loan may not be ideal for getting a mortgage. Personal loans tend to come with higher interest rates than a mortgage, and taking one on means repaying two loans at the same time that you’re paying new expenses that come with homeownership, like utilities and insurance.
If you need a personal loan for your down payment, lenders may see it as a red flag, potentially rejecting your application as a result. Talk with a mortgage professional before using this strategy.
Can I use my retirement fund as a down payment?
Yes. If you have a substantial retirement account, you can tap into it to buy a home. Before turning to your retirement accounts, you might want to confirm how your withdrawal will be taxed.
A Roth IRA account, for instance, allows you to withdraw your funds to buy a home without having to pay taxes on the withdrawal, whereas you may have to pay taxes to withdraw from a traditional IRA.
You might also be able to borrow from your 401(k), though it depends on your plans. Talk to your plan coordinator to learn more about withdrawals and fees.
Note that any money you withdraw from your retirement account will no longer accrue interest, so you’re losing both the amount you withdraw and any future interest you could have earned on it.
If you’re ready to buy a home but your savings account is slim, compare mortgage lenders to find one with down payment requirements that fit your needs. Ask as many questions as necessary to know the exact terms, fees and conditions you face.
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