There are a lot of people with decent incomes who would like to buy a house right now but are afraid they can't come up with the down payment. Fortunately, there are still mortgage options for those with limited cash reserves.
One of the biggest misconceptions in the post-housing bubble era is that you now need to put 20 percent down to get a mortgage. While credit has become much tighter and no-money down loans have virtually disappeared from the strictly private mortgage market, it's still quite possible to get a mortgage for 5 percent down or less.
Here are four options for buying a home with a relatively small down payment:
1. Conventional Mortgage
When people talk about a "conventional" mortgage, what they typically mean is a conforming mortgage -- one that conforms to Fannie Mae and Freddie Mac guidelines so that it can be backed by one or the other. This means a mortgage no larger than $417,000 in most of the country, or a "conforming jumbo" of up to $625,000 in certain high-cost markets.
Technically, Fannie Mae and Freddie Mac will still allow mortgages with as little as 5 percent down. However, many lenders will still require at least 10 percent and perhaps more if your FICO credit rating is below 700. That's not as bad as 20 percent down, but it's still a big pile of cash for many aspiring homeowners, even for a home costing as little as $100,000.
However, both Fannie and Freddie offer special programs for homebuyers interested in purchasing one of the foreclosed properties in their inventory. Fannie Mae's HomePath program allows down payments of as little as 3 percent, while Freddie Mac's HomeSteps allows as little as 5 percent down.
Not only that, but both programs allow buyers to avoid paying for mortgage insurance, which is typically required on any mortgage with less than 20 down. You can also qualify for these programs with less-than-perfect credit.
On the downside, your choice of homes may be somewhat limited. The Freddie Mac financing program is presently available only in the states of Florida and Georgia, though they expect to add more in the near future. Fannie Mae's financing program is more widely available but still can only be used to buy homes in the Fannie Mae inventory of repossessed properties.
2. FHA Mortgage
An FHA Mortgage is probably the most popular option out there these days for a low-down payment mortgage, requiring as little as 3.5 percent down. Your choice of homes is also much broader than under the two programs discussed above, although there are limits on how much you can borrow with an FHA loan, depending on local property values -- $271,050 for a single-family home in most U.S. counties, but as much as $729,750 in certain high-priced areas.
FHA mortgage rates are quite competitive compared to conforming loan rates, although your costs for mortgage insurance will be higher. The FHA charges an upfront insurance premium equal to 1.75 percent of the amount borrowed at the time the loan is closed, plus an annual premium that can be as much as 1.25 percent of the loan balance each year, although that can be reduced with a bigger down payment or shorter loan term.
For more information on FHA mortgages, visit the Department of Housing and Urban Development (HUD) web site at www.hud.gov.
3. VA Mortgage
If you're a qualifying veteran or active-duty service member, a VA mortgage has to be the best deal around. Other service-affiliated persons can also qualify, including certain civilian employees, survivors of service members and those affiliated with the nation's service academies.
A VA mortgage allows you to purchase a home with no money down and no mortgage insurance. That's because Uncle Sam guarantees part or all of the loan, essentially providing lenders with the same financial protection a hefty down payment would provide. As a result, mortgage rates are also very attractive.
You can obtain a VA mortgage for up to $417,000 with no down payment in most of the country, and up to $1 million or more in certain high cost areas. In either event, you can increase your borrowing power if you're willing to make a modest down payment.
VA mortgages are offered through regular lenders who are authorized to handle VA loans. For more detailed information, visit www.benefits.va.gov/homeloans.
4. USDA mortgages
USDA loans are often overlooked by prospective homeowners, despite the fact they're just about the only remaining source of 0 percent down mortgages available to the general public and that they offer some of the best mortgage rates around.
Also known as rural development loans, USDA mortgages technically are limited to home purchases in rural areas. However, the definition of rural is fairly elastic and covers many communities that most people would regard as suburbs or midsized towns.
To qualify for a USDA mortgage, borrowers must meet certain income limits that vary depending on the size of the family and where they live. Generally, your earnings cannot exceed 115 percent of the median income for your area. Homes purchased under the program are also required to be "modest in size, design and cost."
There can be a waiting list for USDA home mortgages because funding for the program is limited. Still, for someone who's looking for a starter home and doesn't live in a major metropolitan area, this can be a very affordable route to home ownership.
For more information, visit www.rurdev.usda.gov/RD_Loans.html.
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