If the thought of saving 20% of your purchase price for a home has you panicking, don’t worry. You don’t necessarily need a 20% down payment, especially as a first-time homebuyer. You may have access to several programs that allow as little as 3.5% down on a home.
Now it does work to your benefit to put 20% down if you qualify for conventional financing. This financing method usually has the best interest rates and is the loan program most people want. If you can’t come up with the 20% down payment, you may use one of the following programs.
FHA loans carried the nickname ‘first-time homebuyer’s loan’ for the longest time. Today, it’s a viable program for anyone that qualifies. What first-time homebuyer’s love the most is the low down payment requirement. You only need 3.5% down on a home. In fact, you can even obtain that 3.5% as a gift from a relative. This means you may not put any of your own money down on the home.
FHA loans also have other positive attributes including:
- You only need a 580 credit score
- You can have a housing ratio as high as 31%
- You can have a total debt ratio as high as 43%
Of course, like all other loan programs, you must prove that you have stable employment and income and that you can comfortably afford the home.
You should know that FHA loans charge mortgage insurance (actually twice) on an FHA loan. You’ll pay an upfront mortgage insurance fee of 1.75% of your loan amount. You will then pay 0.85% of your loan amount each year, but as a monthly payment, so 1/12th of the amount each month. This insurance lasts for the life of the loan.
If you are a veteran, you have an even better loan program at your disposal. The VA loan allows veterans to borrow as much as 100% of the purchase price of the home. This means no down payment. The only money you would need is to cover your closing costs.
Along with the no down payment requirement, the VA loan allows:
- A 620 credit score
- A total debt ratio of 43%
The VA has a unique attribute though, that requires you to prove that you have enough disposable income to cover the daily cost of living each month. The amount of disposable income that you need depends on the size of your family and the location of the home.
The VA loan does not have any type of mortgage insurance. They do charge a one-time funding fee at the start of the loan, but that’s it.
You can get a conventional loan with as little as 5% down on a home. You will pay Private Mortgage Insurance if you do so. The difference in this loan and any of the government loans from above, though, is the length of time you must pay the PMI. With conventional loans, you only pay PMI until you owe less than 80% of the home’s value. In other words, you have the right to cancel the insurance at some point. You cannot cancel the insurance on any of the above government loans. The only way out of them is to refinance the loan.
In order to qualify for a conventional loan, you’ll need:
- At least a 680 credit score
- A maximum housing ratio of 28%
- A maximum total debt ratio of 36%
Take your time and shop around for different loan types to find out which one works the best for you. If you have 5% to put down and have the good credit/debt-to-income ratio, you may want to take the conventional loan, as it may be the cheapest in the end. If not, compare your government program options to decide which loan is right for you.
If you prefer rural living and your household come doesn’t exceed 115% of the average income for the area, the USDA loan may be a good option.
This loan does not require a down payment either – you can get 100% financing. In order to qualify, you’ll need:
- Minimum 640 credit score
- Maximum housing ratio of 29%
- Maximum total debt ratio of 41%
The USDA is unique because in order to be eligible for the program, you must consider your total household income, even if everyone in the house won’t be on your loan. This includes kids old enough to work and grandparents living with you. The USDA does provide allowances that you can deduct from your total monthly income as follows:
- $480 for every child under the age of 18
- $480 for every child over the age of 18 but that is a full-time student
- $480 for every disabled person living with you
- $400 for every elderly person over the age of 65 living with you
The USDA also charges upfront and annual mortgage insurance. You’ll pay 1% of your loan amount upfront and 0.35% of your loan amount each year that your loan is outstanding.