Buying A House with Less Than a 20% Downpayment

There are a variety of programs designed for homeowners who want to get a mortgage but don't have a large amount of cash for a downpayment. Programs such as My Community Mortgage, VA Loans, and FHA Loans allow an individual to purchase a home with 0% down in some cases.

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.

Learn more about My Community Mortgage

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).

Learn more about Homepath

FHA Loans

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.

Learn more about FHA Loans

VA Loans

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.

Learn more about VA Loans

USDA Loans

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.

Blended Mortgage

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.

Housing Market is Slowly Healing

Without fanfare the domestic housing market has become something of a bright spot in an otherwise gloomy national economy. Indicators across the country give one encouragement that better days are ahead.

Lost amid all the doom and gloom of low GDP numbers, high unemployment, the ongoing European sovereign debt crisis and the looming potential of a plunge over the Fiscal Cliff is an improvement in the area of the economy from which originated the current economic malaise:  the domestic housing market.  Various indicators are trending in the same direction and at approximately the same pace: upward, but slowly. The improvement is broad based, however, which is encouraging, as signs of a return to health of the real estate market are appearing across the country.

Among the positive indicators are included the following:

  • Home prices have increased up over their levels of a year ago, according to the S&P Case-Shiller Home Price Index, by a margin of 1.2%. Case-Shiller tracks numbers in a national index as well as in a metro index consisting of twenty of the nation’s largest cities; the latter is showing improvement as well as Atlanta, Detroit and Miami, all among the hardest hit cities during the real estate crisis, showed month to month improvement from May to June.[1] Of all the cities that comprise the index, only Charlotte and Dallas showed a slowdown in their annual price appreciation rates.[2]
  • The number of existing home sales increased in July from the prior month. Even more encouraging, however, was that volume was up 10% year to year.[3]
  • Turnover of inventory has also increased, dramatically, as homes are now typically on the market for 69 days, down 29.6% from a year ago.[4]
  • Sales of new homes were of mixed results, as volume increased, while prices decreased.  Year to year sales are up a startling 25.3%, but the corresponding price drop of 2.5% does dampen enthusiasm somewhat.  The inventory of new homes did drop to a record low of 142,000 in July, which is difficult to view as anything other than strongly positive.[5] 

The recovery of the housing market is crucial to the recovery of the national economy.  The housing crash was the epicenter of our current financial travails with the low volume of housing sales combined with low sales prices representing a persistent drag on the U.S. economy. Some market observers are drawing optimism from recent numbers and are offering the opinion that the housing market is now contributing to, not detracting from, our national economic output. "We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change," said David Blitzer, a spokesman for S&P, in a statement. "The market may have finally turned around." There are a number of factors positively influencing the trend of the recent data, with two being particularly important: reduced inventory leading to competitive bids and historically low interest rates incentivizing buyers, with the caveat that stringent lending laws often lead to those most in need of access to these rates not being able to qualify.[6]

The road forward is not anticipated to be without its obstacles however, as typically seasonal factors begin to take a part as colder weather generally leads to a declining volume of sales.  Additionally you have the wide combination of uncertainties including the presidential election, the Fiscal Cliff and continued high unemployment to name just a few.  Some economists caution against relying on data from a national housing market that many don’t believe exists as real estate markets are Balkanized by their widely disparate data.[7]  As Zillow Chief Economist Stan Humphries opines: "We're still a few years away from a normal housing market"[8]

Still, doubters aside, the housing market has quietly been a rare bright spot in our national economy for several months now and is at or close to adding to our economic output for the first time since 2005.  Indicators consistently point to a rebounding housing market, most experts agree, including David Crowe, chief economist for the National Association of Home Builders, who said, "The fact that we continue to see a strong core of metros showing up on the improving list each month adds to the growing evidence that the emerging housing recovery has a solid foundation on which to build as housing returns to its traditional role of driving economic growth."[9] If Mr. Crowe is indeed correct this is the most welcome economic data this country has seen in a long series of lean, hard years.

Find the best mortgage rates here.

Fed Announces More Stimulus - What That Means for Mortgage and Savings Rates

The Fed today announced several moves that will impact mortgage and savings rates. The positive news is that the programs may result in lower mortgage rates. Unfortunately, savers will continue to suffer an environment of historically low savings rates.

The Fed today announced several moves that will impact mortgage and savings rates. The positive news is that the programs may result in lower mortgage rates. Unfortunately, savers will continue to suffer an environment of historically low savings rates.

One key piece of the Fed’s plan is to purchase $40 billion extra in mortgage backed securities with the goal of driving down mortgage rates. It will also continue to reinvest the principal payments it receives from its existing portfolio of MBS. Together, these activities will result in $85 billion in additional monthly MBS purchases.

Will these activities drive interest rates down further? Jimmy O’ Malley, a senior loan officer at Leader Bank doesn’t think so. According to him, increases in fees from Fannie Mae and Freddie Mac will eat up any reduction engineered by the Fed, resulting in stable rates. He doesn’t expect rates to rise or fall much in the next six months. “Now is still a great time to refinance or purchase a house,” he said, “even if rates don’t drop further. Rates remain near record lows.”

In addition, the Fed’s purchases of MBS were already widely anticipated by the market, and much of the impact may already be included in current mortgage rates.

Impact of Fed Decision on Savings Rates

The Fed statement also said that it will “keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” This increases the period of exceptionally low rates by one year, from mid-2014 discusses in previous statements. For savers this means that the historically low rates on savings and CD rates will continue for the foreseeable future.

Savers can make the best of a bad situation by shopping around and finding banks that are growing and are hungry for consumer deposits. Banks that need consumer deposit funds will pay more.

Impact of Fed Moves on Economy

Beyond the impact on savings and mortgage rates, will the stimulus, dubbed QE 3, help the economy? The best analogy I heard was from an analyst on CNBC (I can’t remember his name). He said the  Fed can rev the engine with these policies, but the transmission can’t engage. Because of that, a revving engine will not result in faster economic growth.