Shortly after the mortgage crash in 2008, popular low- and no-down payment mortgage options vanished from most of the market. The Federal Housing Administration was left to take on the homebuyers who couldn’t afford to put down a lot of money, many of whom were lower income or buying a home for the first time.
To protect themselves from further disaster, banks went back to the more traditional route of requiring most buyers to put 20 percent down on a home, a requirement that put a mortgage out of reach for many Americans.
But with home prices and mortgage interest rates on the rise, banks are beginning to offer some low-down payment programs again. While you’re unlikely to find a 100 percent financing option today, you can find a mortgage for 3-5 percent down in many different ways. Here are several options we found:
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These loan options are run through government agencies – the Federal Housing Administration, the U.S. Department of Agriculture, and the Department of Veterans Affairs, respectively. There are important differences among them, but they all serve a similar purpose: getting individuals into homes with little or no down payments.
FHA loans require 3-5 percent down, but part or all of the money can come from gifts. The benefit of the FHA loan – and the USDA and VA loans, which are more restricted – is that someone with a bad credit history or little credit history can apply.
This may not be the case with more conventional loans available through banks that have lower down payment requirements.
Most states and major cities have multiple non-profit organizations focused on affordable housing. Some of these organizations focus on building/renovating affordable housing, or on preparing consumers financially to buy a home. Many offer specialized lending programs, often with a low-down payment.
Most of the time, non-profit mortgage lenders will have strict income limitations, but they can make the mortgage process less harrowing by walking with you through every step. It’s worth looking online to see if a non-profit lender in your area may offer a product that suits your needs.
Local Banks and Credit Unions
Here in Indianapolis, the locally owned Salin Bank runs a low-down payment mortgage program. This program is directed toward lower-income families and individuals, and you have to be under its strict income limits to qualify for the loan.
Other locally owned banks and credit unions may offer similar mortgage programs, which may include income restrictions. This is a good place to begin if you’re struggling to come up with a down payment.
Plus, the more personalized service at smaller banks and credit unions may mean that the loan officer will work with you if your credit history is less than perfect.
While FHA, USDA and VA loans are backed by the federal government, many state governments offer their own low-income or low-down payment loans.
For instance, Massachusetts’s MassHousing loan program offers affordable mortgages to local homebuyers, even those who aren’t buying their first home. As with many similar programs backed by states, income limits do apply. However, because many areas of Massachusetts boast a high median income, the limits may be higher than you think.
If you’re in the market for a mortgage, inquire if your state has a similar program. Many do, though they can be administered in very different ways. These programs are always worth a look.
Large, National Banks and Mortgage Lenders
Small banks and credit unions certainly aren’t the only ones jumping back onto the low-down payment bandwagon. Major lenders like TD Bank, Bank of America and Wells Fargo are all jumping on board with the new wave of low-down payment mortgage options, according to this CNN Money article.
Here are the details from some of the low-down payment mortgages we’ve rounded up from around the Web:
BB&T First-Time Home Buyer and Low-Down Payment Mortgages
Like many banks with low-down payment mortgage options, BB&T specifically targets first-time homebuyers. Its Affordable Housing loan is for first-time homebuyers and those with limited employment and credit history.
Besides offering a low-down payment, which can be funded at least partially with gifts and grants, this loan allows for a non-occupying co-borrower. While you certainly need to understand all the pros and cons of having a co-signer on your loan, this can be a good way to get into a home when you have very limited credit history.
PNC Affordable Lending Solutions
The PNC Affordable Lending Solutions program offers a small down payment option, provided the buyer pays private mortgage insurance. Another type of mortgage, the PNC Community Mortgage, allows buyers to qualify on non-traditional credit, put down a small amount of money and skip the PMI payments.
PNC’s Affordable Lending options also include access to homeownership grants, specialized programs for public servants, bond programs and other down payment assistance grants.
TD Bank’s Right Step Program
TD Bank’s Right Step program works with borrowers at or under 80 percent of the area median income for their particular area. This means that there are strict income limitations for this type of loan. But if you’re within those limitations, this can be a good option.
The Right Step program requires 5 percent down and 2 percent of the home’s value can come from a gift or grant. That means you only have to put 3 percent down out of your own resources. The Right Step program was set up as an alternative to an FHA mortgage and says it features simpler underwriting and a streamlined mortgage process.
Wells Fargo HomePath Mortgage
The Wells Fargo HomePath program offers down payments of as little as 3 percent and doesn’t require private mortgage insurance. In some cases, the program may offer interest-only payments.
Unlike many low-down payment programs, this one can be used for investment properties and secondary residences. In this case, you’ll need to put 10 percent down. That’s still a very low payment for a non-owner-occupied home. The program offers adjustable-rate mortgage options and doesn’t require an appraisal, which can mean a more streamlined borrowing and buying process.
One thing: The HomePath program requires that you shop for your home on the HomePath.com website.
Putting Little Money Down
Your home is probably the biggest purchase you’ll ever make, so it’s important that you thoroughly understand all the pros and cons of a low-down payment mortgage before going this route.
For one thing, many of the above programs, including federally-backed mortgages like the FHA, require the borrower to pay private mortgage insurance. Whether you pay PMI for a few years, until you have 20 percent equity in your home, or for the life of the loan, as is now required with FHA mortgages, the costs can add up.
On average, private mortgage insurance premiums run $30-$70 per month for every $100,000 that you borrow. So if you borrow $200,000, you’re looking at $60-$140 per month added to your mortgage payment. Over several years, that’s a lot of money.
Also, the less you put down on your mortgage, the higher your interest is likely to be, and the higher your payments will be.
Sometimes, however, saving a 20 percent down payment is next to impossible, especially if you have to pay rent while you’re saving your extra cash. In this case, applying for a low-down payment mortgage can get you into a home more quickly. Then you can focus on building equity so that you can put more money down on the next home you buy. In addition, there are many programs for low income families that can help you buy a home