It is a common myth that you need 20 percent to put down on a home or you cannot get a mortgage. There are many other options out there – you just have to find them. If you think outside of the box and look for loans other than standard conventional loans, you might be surprised at what you find. In fact, there is even a conventional loan that allows a down payment as low as 3 percent! Of course, each loan has its own parameters and requirements including mortgage insurance, but if it gets you into a home and you can prove that you can afford the payments, you have nothing to lose and everything to gain.
A common mortgage borrowers apply for when they do not have 20 percent to put down on a home is the FHA mortgage. Today, this is not the only mortgage available with a low down payment, but those borrowers that have a blemished credit history; higher than average debt ratio; or other special circumstances might do better with this type of loan. There are pros and cons to the FHA loan. The fact that they are easy to qualify for is a major benefit, but the upfront mortgage insurance along with the annual mortgage insurance paid on a monthly basis can add a significant amount to the mortgage payment making it a more expensive option for some borrowers.
Veterans have a wonderful advantage when they are ready to purchase a home. The VA mortgage does not require any money down and borrowers may even be able to wrap their closing costs into the loan. This could leave veterans with little to no money to bring to the closing. VA loans do not have mortgage insurance fees, but they do have a funding fee which is paid up front, but can be included in the loan amount if necessary. VA mortgages are easy to qualify for because they too are guaranteed by the government, giving lenders more leeway on what they can allow when they provide mortgages to veterans.
The USDA mortgage is another government loan, but it is not nearly as common as the FHA or VA loan. The benefits of this loan are many, so borrowers should look into it if the property they wish to purchase is in a rural area. The USDA has a different idea of rural than most people, so you might be surprised to find out that your home falls into the allowable areas. The thing that sets the USDA loan apart from others is the maximum amount of income you can make in order to be eligible. It is possible to make too much money and not qualify for this loan because it was meant to be a loan to build up the less fortunate areas of the U.S. The USDA loan is another loan that does not require any money down and has favorable terms.
Believe it or not, there is a conventional option when you cannot put 20 percent down on your home. In fact, you do not even have to put five or ten percent down as long as you have good credit. The Conventional 97 program allows a low, 3 percent down payment. The catch is that you have to have really good credit and a low debt ratio. Conventional loans are much less forgiving than any other type of loan, so you have to have all of your ducks in a row if you plan on applying for the conventional loan. If you do go this route, you will have to pay private mortgage insurance until your loan-to-value ratio is below 80 percent.
As you can see, there are many options when it comes to purchasing a home without 20 percent down on it. It is important to weigh your options as you have many to choose from. Each program has its own requirements, fees, and stipulations. Before you settle on one program, crunch the numbers to see what other programs have to offer. You might be surprised to find out which program works out the best financially for you. Remember to take into consideration the amount of time you plan on staying in the home as that plays an important role in what type of loan you should take. If you are not staying in the home long, paying higher interest rates and lower fees makes more sense since you will not have a lot of time to pay principal down which means you will not have a lot of your investment to make back.