For first-time homebuyers, the down payment is often the largest obstacle. A standard 20% down payment is simply unachievable for many young families just starting out in their careers. The housing crisis shut many of these homebuyers out of the market, as low-down-payment loans became as hard to find as the Loch Ness monster – occasional rumored sightings, but no proof of existence.
Eventually the market loosened to accept higher-risk mortgages, and Fannie Mae and Freddie Mac reintroduced 3% down payment loans. Shortly thereafter, 1% loans became available through such programs as Freddie Mac's "Home Possible Advantage" program. With a Home Possible Advantage loan, a lender could effectively change a 3% loan program to a 1% loan program by providing the 2% difference as a gift.
Despite significant demand for 1% down loans, Freddie Mac has discontinued the 1% program effective for mortgages with settlement dates on November 1, 2017 and beyond. Some lenders were distorting the program through the use of "premium pricing" – essentially a means for the lender to give the appearance of a 2% gift but actually recoup those costs through higher interest rates or fees.
Freddie Mac still allows down payment contributions to come from certain sources, including gifts from relatives – they just can't come from the lender unless the homebuyer has already contributed at least 3% through their own efforts.
While Freddie Mac may have bowed out of the market, low-down-payment options still exist. Fannie Mae continues to offer low-down-payment loans with similar programs, since they had already outlawed the practice of premium pricing. Other options include:
Federal Housing Administration (FHA) Loans – FHA loans offer down payments as low as 3.5% and are a decent option for buyers that have lesser credit scores (although if your credit score is too low, you may not receive the 3.5% down payment option). You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. Lower rates are available because FHA loans come with two levels of insurance – a premium that is paid upfront and that can be financed into the mortgage loan, and monthly premiums that are analogous to private mortgage insurance (PMI).
Veteran's Administration (VA) Loans – If you have a suitable military background, consider a VA loan. Active duty service members, along with qualified veterans and some National Guard and Reserve members, can acquire mortgage funding with no down payment required. There is no mortgage insurance, as the loan is backed by the Veterans Administration. Navy Federal Credit Union also offers no-down-payment financing to their qualified members, in a similar fashion to the VA loans.
US Department of Agriculture (USDA) Loans – Don't be fooled by the name; these loans aren't strictly for agriculture. USDA loans are designed to promote homeownership in more rural communities, and the definition of rural is fairly loose. As with the VA loans, there are two levels of protection for the lender – a 1% guarantee fee that is assessed upfront and may be incorporated into the loan amount, and an annual fee of 0.35% of the balance of the loan.
Each of the loans above has credit score limits, along with other qualifications and restrictions that may apply. Check into the details of each program to see if any of them are a proper fit for you.
You may have fewer options for a low-down-payment loan than before, but that doesn't mean that a low-down-payment loan is out of your reach. Check your qualifications against the programs listed above – but whether you qualify or not, consider if you would be better off simply waiting until you have saved up a larger down payment fund and/or improved your credit score to qualify for a better offer. The amount of money that you can save over the life of the loan may make it worth the wait.
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