There are several obstacles one might face when attempting to purchase a home. For many homebuyers, the lack of a down payment is a factor that can stand between them and the home of their dreams. As a result, finding a mortgage lender offering low to no money down mortgages is necessary to make their dreams a reality.
A low down payment can ensure you can purchase a home sooner than later. However, lower down payments also come with higher costs in other areas, such as a higher interest rate, which means a higher monthly mortgage payment.
Pros and Cons of a Low Money Down Mortgage
The main benefit of a low money down mortgage is that it gives you the ability to purchase a home sooner—you don’t have to wait until you have enough money saved up for a down payment. As a result, you can call yourself a homeowner more quickly.
The cons of a mortgage with a low down payment include additional expenses. Typically, the lower the down payment, the higher the interest rate. The higher the interest rate, the higher your monthly payment. Also, low down payment mortgages require mortgage insurance for the life of the loan or until you reach a certain equity threshold in the home, depending on the loan product.
It’s also true that, with a low down payment mortgage, you will have little to zero equity in the property. In such a case, you might end up owing more on the loan than the home’s worth if your home value decreases.
Types of Low to No Money Down Mortgages
Conventional loans are the most common loans home buyers secure. The government-backed entities Fannie Mae and Freddie Mac design conventional loan products. Each product comes with a varying set of loan terms and requirements.
Freddie Mac’s Home Possible program and Fannie Mae’s HomeReady program both offer a 3% down payment possibility for qualified buyers. With Fannie Mae’s HomeReady program, borrowers can have a FICO score of 620 or higher and up to a 50% debt-to-income ratio, which are more relaxed requirements than other conventional loan products.
FHA loans allow for a down payment as low as 3.5%. With that level of down payment, a minimum credit score of 580 is required. With a 10% down payment, a minimum credit score between 500 and 579 is required. Additionally, one’s debt-to-income ratio cannot exceed 50%.
A U.S. Department of Agriculture (USDA) loan is a zero down payment loan for individuals buying a home in rural areas and certain suburban areas. These loans are issued through the USDA Rural Development Guaranteed Housing Loan Program, also referred to as the USDA Loan Program. A USDA loan is backed by the USDA and can be issued by a local lender or the USDA. New home loans and home improvement loans are available.
Income thresholds for a USDA loan vary by region. If you meet the income requirement, streamlined processing is available for those with a credit score of 640 or above. For those with a lower credit score, stricter underwriting standards must be met. Nontraditional credit history is also an option to help you qualify for a USDA loan.
A VA loan might be an option for those with military connections. VA loans are backed by the U.S. Department of Veterans Affairs, though local lenders issue them. The U.S. Department of Veterans Affairs does not set a minimum credit score for these loans, though local lenders do. The range for a minimum credit score is typically between 580 and 660.
Navy Federal Credit Union Home Loans
The Navy Federal Credit Union offers several home loan programs with zero down payment for qualified members. Eligibility is restricted to Credit Union members, which is generally reserved for current and inactive military personnel from all branches, U.S. Department of Defense employees, and family members of these groups.
First-Time Home Buyer Loans
First-time home buyers can typically qualify for special loan terms and government-sponsored programs offering financial support. Special benefits for qualifying first-time home buyers can include grants, low down payments, and financial assistance to help cover closing costs. Local, state, and federal governments often sponsor programs, and several lenders also offer first-time home buyer loan specials and incentives.
Finding a Low Money Down Mortgage
To find the best terms available for any home loan, it’s best to shop around. Different lenders have different loan programs and terms, including low down payment mortgages. Also, there are several programs offered by state and local governments for first-time and repeat home buyers, so do your homework and find out what might be available to you in your area.