Before the financial crisis, the “Great Recession,” and the housing collapse, it was common and easy for a homebuyer to purchase a house with 0% down. In some cases, a homebuyer wouldn’t put anything down and would get money back upon closing, which could be used for renovations, home furnishings, or other expenses.
Since the collapse of the mortgage market, it has become common to hear that those days are over. That’s not necessarily true. Although it has gotten tougher and more expensive to purchase a home without a down payment of 20% or more, it is still possible. While 20% down or more is ideal for receiving a conventional loan, and still necessary for a jumbo loan, it is always necessary to purchase a home.
“There are various programs aimed at helping buyers without a large amount of cash to purchase a new home,” said John Shaedel from the lender National Mortgage Alliance. “The expanded agency mortgage route offers programs such as My Community (3-5% down), HomePath, and various other First Time Buyer Assistance programs. There is also the government route, with FHA programs (3.5% down) and special case FHA programs as well as Community Assistance down payment programs. If someone is a veteran, there are VA loan programs (0% down). If in a qualified area, there are USDA RHA programs (0% down).”
My Community Mortgage
My Community Mortgage is a Fannie Mae program that provides very flexible mortgage options for qualified low-income individuals. The program will finance up to 97% of a home (meaning the buyer only needs a 3% downpayment). It's available to purchase or refinance a single-family home, PUD, condominium, or a 2–4 family home. Other features of the program include:
- Only requires a 3% downpayment from the borrower
- Competitive rates
- Requires PMI for downpayments of less than 20% but at a reduced rate.
- Not just for the first-time homebuyer and can be used to refinance a mortgage.
- Available for fixed-rate or variable rate mortgages.
Homepath Mortgage Program
Homepath is a program run by Fannie Mae to help sell properties that they have received in foreclosure. Properties held by Fannie Mae are listed as Homepath and buyers of those properties can purchase them with as little as 3% down. Other features of Homepath are:
- No need for an appraisal
- Available for fixed-rate, variable, or interest-only loans
- No PMI (mortgage insurance) necessary
- Available for primary residences, second home, and investment properties (some condos are also available).
FHA Loans are perhaps the most popular program for those who want to buy or refinance with a small downpayment. The loans allow anyone regardless of income to purchase or refinance a home with as little as 3.5% down. While anyone can take advantage of an FHA loan, the property must be a one to four unit structure. In addition, there are limits to the loan amount, which vary depending on which state the house is located.
“The biggest drawback to an FHA Loan are the fees associated with it. FHA is charging twice the fees they did a few years ago,” said Jim O’ Malley, a Senior Loan Office at Leader Bank. Compared to a non FHA mortgage, those fees can make a significant difference. FHA loans now have a 1.25% upfront fee and 1.25% PMI fee. So, on a $200,000 mortgage, the upfront fee would cost $3,000 upfront. FHA loans are generally competitive but adding the 1.25% of PMI makes them more expensive. A 3.25% 30-year fixed rate mortgage would become 4.50% with the PMI included.
The government estimates that more than 27 million veterans and active duty military personnel are eligible to receive a VA loan. These loans allow qualified buyers to purchase a home with no downpayment. In general the loans are good up to $417,000, although they can vary depending on the state and geography. Other advantages of a VA Loan include:
- No mortgage insurance (PMI).
- Limitation on closing costs.
- Traditional or variable mortgage loans. Buyers can choose a traditional 30 year fixed rate mortgage, or a variety of ARM options.
- Loans can be used to buy a house, condo (must be VA approved), or co-op. Loans can also be used to build a house or refinance an existing house, condo, or co-op.
Even if a veteran received a VA loan in the past, they may still be eligible to refinance or receive a new VA loan depending on the number of entitlements remaining or if the prior loan was paid off.
The USDA Rural Development Single Family Housing Guaranteed Loan Program offers guaranteed loans to with no downpayment to rural homebuyers. The program partners with approved local lenders to finance 100% of the value of a house to eligible rural buyers. To quality, a buyer must purchase a home in a qualifying rural area and household income must exceed the limit established for that area. Key features of the program include:
· 100% financing, no downpayment required.
· Individuals with “non-traditional” or lower than average credit scores may be accepted.
· USDA offers 30 year, fixed rate loans.
· Not limited to first time homebuyers.
· Eligible property types include existing homes, new construction, modular homes, Planned Unit Developments (PUD’s), eligible condominiums and new manufactured homes.
A homeowner can also use a blended mortgage to finance the purchase of a home or refinance a purchase. Common before the financial crisis, blended mortgages allow homeowners to cover part of the downpayment with a home equity loan. A common blended mortgage might be a 80-10-10.
80% - Mortgage financing
10% - financed via a home equity loan
10% - financed via cash downpayment.
In this way a buyer could finance the purchase with less than 20% down and also avoid paying mortgage insurance. Not paying mortgage insurance can save the homeowner a significant amount.
Since the fiancial crisis it has become more difficult to structure a blended mortgage. Lenders have tightened up their standards and according to Mr. O’ Maley, they want to see house and other credit payments comprise no more than 45% of a household’s total income. Blended mortgages are tough with condos.
Jumbo Mortgage Downpayment Options Limited
None of the above applied to jumbo mortgages. Buyers who need a jumbo mortgage to finance their home need to have at least 20% down or it will be very difficult or impossible to get the loan approved. And none of the programs covered above are for non-conforming (jumbo) loans.