As mortgage rates fall to absurd-like levels, the cost of home ownership drops, too. Mortgage payments are 18% less expensive today as compared to one year ago. For today’s home buyers, though, “making mortgage payments” may not be a concern — it may be making a downpayment. Thankfully, a bevy of low- and no-downpayment mortgage options remain available to buyers in all U.S. markets.
You Don’t Need To Make A 20% Downpayment
The most difficult part of an economic recovery can be identifying its bottom; even the experts can’t tell a “blip” from a “bounce”. Several months — or several years — of data are required to properly identify a market bottom. This is bad news for bargain hunters, of course, because by the time a market bottom can be fingered, it’s too late to take advantage; prices have already started rising.
Today, we can call the housing market bottom with some modicum of confidence. The housing market bottomed in October 2011.
Since October 2011, housing market data has been steadfastly stronger . Gains have been modest and incremental. Some months have shown retreat but the overall trend has been toward growth and gradual expansion.
On average, national home prices have moved higher, U.S. buyer demand has grown larger, and confidence in the housing market overall is at its highest point since before last decade’s downturn.
Furthermore, in many U.S. markets, on account of low mortgage rates, home affordability has reached record-high levels.
Unfortunately, home affordability is rising faster than buyers’ abilities to make a downpayment. Few first-time buyers have large savings on-hand, and many of today’s “move-up” buyers are netting little or no home equity from their respective home sales.
FHA Mortgage : 3.5% Downpayment
The FHA mortgage is somewhat of a misnomer because the FHA doesn’t actually make loans. Rather, the FHA is an insurer of loans. It has a published series of loan guidelines and for banks making loans which meet said guidelines, the FHA will against loss.
FHA mortgage guidelines are famous for their liberal approach to both credit scores and downpayments. The FHA will typically insure a loan for which the borrower has a low credit score so long as there’s a reasonable explanation behind the low FICO.
The FHA will also allow a downpayment of just 3.5 percent in all U.S. markets.
Other FHA loan traits include :
- Home buyer downpayment of 3.5% may come entirely from “gift funds”
- Minimum credit score requirement of 500
- Mortgage insurance premiums paid upfront at closing, and monthly thereafter
Another boost for the FHA program is that the FHA will insure loan sizes up to $729,750 in designated “high-cost” areas nationwide. This includes Orange County, California; the Washington D.C. metro area; and, New York City’s 5 boroughs.
By contrast, conforming mortgages cap at $625,500.
Conventional 97 : 3% Downpayment
The Conventional 97 program is available from Fannie Mae. It’s a 3 percent downpayment program and, for many home buyers, it’s a less-expensive option as compared to an FHA loan.
Furthermore, the Conventional 97 mortgage allows for its entire three percent downpayment to come from gifted funds, so long as the gifter is related by blood or marriage; or via legal guardianship or domestic partnership; or is a fiance/fiancee.
The Conventional 97 basic qualification standards include :
- Loan size may not exceed $417,000, even if the home is in a high-cost market.
- The subject property must be a single-unit dwelling. No multi-unit homes are allowed.
- The mortgage must be a fixed rate mortgage. No ARMs are allowed via Conventional 97.
In addition, the Conventional 97 program enforces a minimum credit score on all borrowers of 680. If a gift of downpayment is accepted, though, the minimum credit score threshold rises to 740.
VA Mortgage : 0% Downpayment
The VA loan program is available to military borrowers nationwide. Insured by the U.S. Department of Veteran Affairs, VA loans work in a similar fashion as FHA loans — the VA is an insurer of loans and not a maker of them.
The qualification standards for a VA loan are straight-forward.
In general, active duty and honorably discharged service personnel are eligible for the VA program. In addition, home buyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of service members killed in the line of duty.
Some key VA loan traits include :
- Intermittent occupancy is allowed
- Bankruptcy and other derogatory credit do not immediately disqualify a buyer
- Funding fees are collected at closing, but no mortgage insurance is required
And, similar to FHA loans, VA loans allow for loan sizes of up to $729,750 in high-cost areas. This can be helpful in areas such as San Diego, California; and Honolulu, Hawaii which are home to U.S. military bases.
USDA Mortgage : 100% Financing
The USDA offers a 100% mortgage, too. However, rather than qualify borrowers by service status as the U.S. Department of Veteran Affairs does, the USDA qualifies borrowers based on neighborhood density and household income.
What’s notable about the USDA home loan program is that, although it aims to “assist low-to-moderate income rural homebuyers”, the USDA Single Family Housing Guaranteed Loan Program can be used in many U.S. suburbs, and by families who make a good living.
Many non-big city college towns including Christiansburg, Virginia; State College, Pennsylvania; and even suburbs of Columbus, Ohio meet USDA eligibility standards.
Key USDA loan traits include :
- Eligible home repairs and improvements may be included in the loan size
- No maximum purchase price exists
- Guarantee fee added to loan balance at closing; mortgage insurance collected monthly
Another key benefit of USDA mortgages is that USDA home loans tend to carry the lowest mortgage rates of all of the low- and no-downpayment mortgage programs.
Other Low-Downpayment Mortgage Options
For home buyers not meeting the FHA mortgage guidelines, or whom are otherwise ineligible for the VA 100% loan or USDA 100% mortgage, other low downpayment options exist.
Fannie Mae and Freddie Mae both allow up to 95% LTV on the purchase of a single-family primary residence, for example, so long as the 5% downpayment comes from the borrower’s own funds. The downpayment may not be a gift.
For buyers who do accept cash gifts for downpayment, Fannie Mae and Freddie Mac will still verify that 5% of the downpayment is from the borrower’s own funds unless the gift of downpayment is 20% of the home’s purchase price or greater.
As an illustration, if buyer under contract for a $250,000 home accepts a cash downpayment gift of $50,000, no further verifications are required. If you go this route, be sure to follow the downpayment gift rules. Make a mistake and the gift may be nullified in underwriting.
Home Buyers Get Low Mortgage Rates
With mortgage rates low and home prices rising, the housing market figures to get crowded in 2013. There will be more home buyers nationwide chasing fewer homes for sale. If you’re among the buyers and have concerns for a downpayment, just remember that low- and no-downpayment mortgage options exist.