How to Buy a Home With a Low Down Payment
It’s a big roadblock on the path to homeownership: the down payment. Now some lenders are backing away from FHA loans, the key program allowing low down payments and favorable interest rates for many new buyers. These lenders say strict regulations cause them to shy away from FHA loans. And recently some of the largest banks have effectively eased themselves out of the FHA market by slapping additional credit requirements on top of FHA lending standards. But there are a couple of other federal loan programs that lenders love — and first-time homebuyers will, too.
A Down Payment That’s Tens of Thousands of Dollars Less
Renters are placing a greater priority on building their emergency savings, stocking away money for retirement or their children’s education than on saving for a down payment on a home, according to a recent survey by Freddie Mac. It’s no wonder: The traditional 20% down payment that most lenders prefer can be an awfully big number to hit. For example, it’s $60,000 on a $300,000 home. And that’s before closing costs and other buying-a-home expenses. But something around 3% down — now, that can seem doable. It’s about $10,000 down on the same $300,000 home. A 3.5% down payment option has been the big draw for FHA loans. But two other government sponsored programs are offering 3% down home loans, backed by Fannie Mae and Freddie Mac.
Don’t sweat it, I’ll keep this simple. Here’s what you need to know.
Fannie, Freddie, FHA: They all sound the same, right? But there’s a big difference to lenders — and they’re the ones you’ll be working with on your home loan. They know the ins and outs of all three and deal with that; you just need to know what options are out there.
While some of the largest lenders have been turning their backs on FHA loans, they like Fannie and Freddie-backed mortgages — which are considered “conforming” loans — because they don’t have to wade through all the regulations and restrictions of FHA-backed mortgages. While FHA loans still serve their purpose for some buyers, folks with (credit) scores above 720 usually find conforming loans a better option, especially now since they can put as little as 3 to 5% down. Borrowers can even get help with the down payment. With these programs, the down payment can be a gift.
But there are some restrictions built into the programs that let you borrow up to 97% of the home’s value. At least one of the buyers has to be a first-time homebuyer (meaning you haven’t owned a home in the past three years), the home must be your primary residence and only fixed-rate mortgages are offered — adjustable-rate loans are not eligible. You will also pay for private mortgage insurance. But you may be able to cancel PMI after you reach 20% equity in your home with a Fannie Mae or Freddie Mac backed loan, while FHA mortgage insurance is charged for the life of the loan. For borrowers who aren’t first-time homebuyers, there are other loan programs with down payments as low as 5%.
The Bottom Line
FHA loans are still an option for first-time homebuyers, especially if your credit is less than perfect. But you’ll probably need to look for smaller, independent FHA-approved lenders. But if you have good credit, Fannie- and Freddie-backed loans open up new possibilities for qualified borrowers who just can’t quite get over that 20% down hurdle. And remember to shop a handful of lenders to find your best mortgage rate and best-priced home loan.
Contact me if you are interested in discussing the loan process. I work with a variety of lenders that help buyers get the most for their money while answering as many questions along the way.