Sometimes buying a home can feel like an obstacle course filled with hurdles, hoops, and hills. And saving up enough money to make a down payment is on of the biggest challenges keeping many from starting their home buying journey. But there are other ways to achieve your dream. There are some loan programs to consider that won’t require you to make a big down payment on your new home, if one at all.
Mortgages that don’t need down payments can have unique limitations or requirements, but they may open up new possibilities.
Down payment-free mortgages do come with their own set of hoops; they’re just a little different, which can be a good thing. A mortgage opens a lender up to a certain amount of risk, and if a catastrophe strikes where the borrower is unable to make their monthly payments, the lender could lose their investment. A down payment partially protects them from loss because it’s made upfront and can’t be lost. So, to compensate, down payment-free loans often have their own set of requirements.
VA loans are guaranteed by the U.S. Department of Veteran’s Affairs to help the men and women of our armed forces finance their dreams of homeownership. As a guaranteed loan, the VA will protect the lender from loss and cover the loan, if a borrower defaults on their payment. This lets lenders skip their down payment requirements without risking huge losses.
VA loans allow you to completely finance your new home without paying for mortgage insurance.
Conventional loans require you to buy mortgage insurance if you make a down payment of less than 20%. But, VA loan borrowers don’t need to worry about this, which can lead to thousands of dollars in savings each year.
VA loans are available to people who meet the income, credit, and military service requirements set by the VA. This is a great program to consider if you or your spouse have served in the armed forces because it is exclusively for:
If you’re approved for a VA loan, you’ll have to find a house that also meets the program’s requirements. To be financed, the property must be used as the borrower’s primary home and held up against the minimum appraisal standards set by the VA.
Don’t Forget Housing Entitlements:
VA loans are directly tied up with individual housing entitlements provided by the VA, which will only guarantee to cover your loan to a certain extent. If you use up your entitlement or want to finance a loan that exceeds your limits, a down payment may be needed.
Like VA loans, USDA mortgages are also guaranteed by the government. In this case, they are covered by the US Department of Agriculture. Though there are a few different loan programs offered by the USDA, they’re all designed to help people affordably purchase homes in rural areas. This is ideal if you’re searching for a picturesque house in the country and want to nix your down payment.
One of the most attractive things about USDA loans is that they don’t require down payments from qualified borrowers. You can finance the whole cost of your new home, but can always choose to add a down payment to reduce your total loan amount.
USDA Insurance and Geography Requirements:
Even though you won’t need a down payment, USDA loans are required to have mortgage insurance. This can add to the overall cost of your loan. This insurance has an upfront fee that can be financed into your loan, and an annual percentage fee.
The USDA loan program can only finance homes in rural areas and for low-t0-moderate income homebuyers.
Not every property can be financed with this program. But the USDA has a broad definition of rural that might surprise you. To find out if your new home makes the cut, check out the map provided on the USDA website showing where the limits begin and end.
Along with geographic limits, the program also has maximum income limits. To qualify for a USDA loan, you cannot earn more than 115% of the median income for area that surrounds your new house, meaning that income requirements will change depending on where you’re house hunting. Eligibility is also dependent on acceptable credit and ability to repay.
Some parts of the USDA loan program also have sales price limitations. The Direct Home Loan Program cannot be used to purchase a home that has a sale price higher than the limit set for that particular area. Just like the income requirements, these limits can change depending on where your new house is located.
Many states, and some counties, have agency or bond programs. These state agencies offer loans and programs that are intended to help boost the housing economy by opening up the market to as many buyers as possible.
State programs offer reasonable financing options to help make home ownership more affordable, which can include loans with down payment assistance.
Qualifying For A State Program:
Most state programs have maximum income and sale price limits to ensure that they continue to make the housing market more accessible. Just like USDA loans, these limits are based on the area in which your new home is located.
Most of these programs are only available for first-time homebuyers or anyone who hasn’t owned a home in the past three years. You’ll likely be required to live in the your new property making it your primary residence, and are generally not allowed to use this home for a business.
Not every lender participates with every agency, so be sure to ask your mortgage banker if there’s a program available and right for you.
For one reason or another, if you don’t qualify for any of these loans, your search doesn’t need to end here. There are other loan programs like FHA loans or the 97% Conventional Plus Series (which includes the HomeReady®, Fannie 97, and Home Possible® Advantage programs) that can offer you loan options with significantly reduced down payment requirements.
If you have questions about down payments, loan programs, or any other part of the mortgage process, check out the resources on the Atlantic Bay blog and contact your mortgage banker, or look for a mortgage banker on our website if you don’t have one.