The Mortgage Directory

Mortgage Loans with a 5% Down Payment or Less?

There are many loans available right now that offer a solution to almost every type of financial situation. (More on mortgage loan types). This flexibility has helped sustain the housing boom and has allowed many people to get into a home they can call their own. Today most people can qualify for a loan that makes affording a home within their grasp.

One of the major obstacles to buying a home is the down payment. To qualify for a traditional mortgage, buyers used to need around 20% of the sale price to put towards a down payment. Times are changing and now there are some methods to transgress this old style of obtaining a mortgage. Buyers now have programs available, which will allow for 5% down or less toward their mortgage.

FHA and VHA Low Down Payment Loans
FHA and VA loans are the most common way people use to get into a home at a low down payment with VA being the less common of the two. To qualify for a VA loan you must be a veteran of the armed services. The vast majority of these loans are made with a 0% down payment. FHA loans are similar in that they are government backed and generally are made with a down payment of only 3%. A good rule of thumb is that a buyer can get into a FHA loan with a total cost of 5% of the sales price, down payment and closing costs inclusive.

The greatest drawback to these types of loans is that there are limits to the maximum size of the loan. These limits vary from area to area but generally are around $250,000. The consumer will want to check with their lender to see if the property they are looking for falls within the loan limit for their area. There are also extra fees that one would not find on most conventional loans. On a FHA loan the borrower must pay mortgage insurance and on a VA loan the borrower is charged a 2% funding fee.

Non-Profit Assistance Programs
Another option to achieve a no down payment purchase is the current wave of non-profit assistance programs. Some are only available to first time homebuyers but the vast majority is accessible to everyone. Most programs use a loophole in FHAs’ rules that allow non-profit groups to contribute money for down payment and closing costs. The non-profit group will charge a fee of around $500 and allow the seller to deposit an agreed upon amount with them. The non-profit organization will then forward that amount to the buyer to be used toward their closing costs and down payment. The amount put toward the buyer’s costs is agreed to upon acceptance of the contract.

These programs will require specific language in the contract and there is a maximum rate of around 3% that can be contributed. This type of contribution can be used on a conventional loan directly with no additional steps necessary. The seller and buyer simply would agree to the amount contributed and that amount would be debited from the seller then credited to the buyer at the closing table.

To conclude, there are many ways and options to purchase a home with a no or a low down payment. It is something that can be worked out creatively with the seller. Even in hot markets where credits to the buyer are rare this is possible. The buyer could make an offer of more than they would otherwise want to pay in the amount they wish to have credited back at closing for costs and down payment.

As long as the property will appraise for the higher amount, and in most busy markets it will, the buyer could take advantage of this option. One of the only downsides to accessing a no or low down payment is that the interest rate is typically a little higher. Usually though, the appreciation in value, today’s low interest rates, and simply the ability to own property will more than make up for the higher rate.

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