It is completely aggravating — interest rates for 30-year fixed mortgages are at nearly historic lows and have been for some time, but you have not been able to save the 20% down payment that is typically required for a new home. If you qualify, some Federal Housing Administration (FHA) programs can reduce your down payment to 3.5%. Unfortunately, that is still out of your range.
Can you handle a 1% down payment? If so, you may be able to take advantage of a program administered by Quicken Loans as part of a partnership with Freddie Mac. As reported in this MoneyTips article, the Quicken Loans/Freddie Mac partnership was designed to help underserved housing markets without restoring the dangerous credit practices that led to the housing crisis.
The Quicken Loans program uses a novel approach to reach a 1% down payment. The program is constructed to fit into the Home Possible Advantage program that was introduced in December 2014 by Freddie Mac. While the Home Possible Advantage program requires a 3% down payment, Quicken Loans supplies the other 2% as a grant. This allows the Quicken Loan program to meet the 3% criteria with only a 1% contribution from the homeowner.
Thanks to this program, you could purchase a $250,000 home for a down payment of only $2,500 — assuming that you meet the eligibility requirements.
The program is only available for the purchase of a single family home or condominium. It is not available for purchase of a second home or investment homes, and cannot be used to refinance an existing home.
Since the program is really designed for underserved markets and first-time homebuyers, the income and credit requirements attempt to thread the needle of targeting those truly in need of low down payments without compromising principles of risk and ability to pay. To demonstrate need, your income must be below the median income for the county you live in. To demonstrate the ability to pay, your debts must be low enough to keep your total debt-to-income ratio at or below 45%, and you must have a minimum FICO credit score of 680.
First-time homebuyers are required to take a free online course supplied by Quicken to meet eligibility requirements, but any eligible borrower may also take the online course for free.
The 1% down payment program and the 3% backing program from Freddie Mac (along with a similar 3% program from Fannie Mae) are ideal for millennials who are in the early stages of their careers. They have not had time to save up sufficient down payment funds, but have relatively stable and moderate entry-level incomes. As long as debt has been properly managed, they can take advantage of the currently low rates without having to wait and potentially being priced out of the market entirely.
All three of these programs have another great advantage compared to 3.5% FHA loans. There are no life-of-loan or upfront mortgage insurance premiums to deal with. Those costs are often financed into an FHA home loan, pushing the loan-to-value (LTV) ratio above 98%. Thanks to the 2% grant, the Quicken 1% loan program allows you to retain greater equity at a lower LTV ratio.
The tradeoff for a low down payment is a higher loan amount and therefore larger monthly payments, so make sure that you have the income and the fiscal discipline to handle those payments. If so, and you are interested in the Quicken Loans 1% program, check out the Quicken Website for details and the link to an application. The 1% down program is not right for everyone, but for some it may make the difference between being a homebuyer and being forced to save and wait — and hope that rates and home prices stay relatively low.