With the rising real estate prices throughout the country, purchasing a home can be an expensive endeavor. But it’s not because of interest rates, which remain at near-all time lows. It is also not because of the monthly payments, which are typically near the same price as rent. Rather, it is typically the down payment can represent a barrier to entry.
Many financial experts advertise this idea of 20% down. With many homes closing at $500,000 or more, that would require at least $100,000 in cash as a down payment – a difficult sum of money for anyone, especially first time homebuyers or those with minimal equity.
Fortunately there are several loan programs available that can provide you with a loan at a much lower down payment, sometimes as little as 0% to 3%. Depending on your credit score, income, and where you want to purchase, there may be options available.
Based in the Sacramento area, Landrum Loans is a mortgage originator that can assist you in determining which loan types may be right for your family and which you qualify for. Our goal is to provide you with the best financial options for your home purchase or refinancing in California, Texas, Colorado, and Arizona. Call Landrum Loans at (916) 813-9306.
Types of Low Down Payment Loans
There are several options available for loans that require 10% or less for the down payment. Each has their own eligibility criteria, qualification requirements, and terms. Landrum Loans can go over all of the possible loan options with you to determine if any of these low down payment loans is a good solution for your financial situation. Some of the options we have experience in providing include:
- FHA Loans – Backed by the Federal Housing Administration, these loans require a 3.5% down payment and offer relatively affordable interest rates. A lower credit score may require a 10% down payment.
- Fannie Mae HomeReady Loans – This loan requires 3% down, and accepts co-borrowers who do not live at the property and additional sources of income, although it does have a minimum credit requirement.
- Freddie Mac HomePossible Loans – These loans require a 3% down payment for those earning less than 100% of the median income of other homeowners in your area.
- Fannie Mae 97% Loan to Value Mortgage – A conventional loan also offered through Fannie Mae, this has a 3% down payment and is available to first time home owners.
- 0% Down USDA and VA Loans – For those who qualify, a zero down payment loan may also be possible. There are two main government-backed loan programs that provide a loan with no down payment – VA loans and USDA loans. With the first, you must be serving in the U.S. Armed Forces or be a veteran. A USDA loan provides a no down payment loan for qualified home purchases in rural communities.
At Landrum Loans, we’re figure out what loan is best for you, and then start the application process for approval.
Qualifying for a Low Down Payment Mortgage Loan
Whether or not you qualify for a low down payment loan will depend on the type of loan. Lenders will look at different factors, including:
- Down Payment – Most Low down payment loans still require some funds down, which you will need to have in savings.
- FICO Credit Score – Some low down payment loans have minimum FICO credit scores to qualify, such as 580 for FHA loans and 620 for Home Ready loans. Lenders may also have their own credit requirements.
- Home Type – Many of these loans require the home you are buying to be a primary residence. Others may require that your home have certain features, be in good repair, and meet other conditions.
- First Time Home Buyer – You may need to be a first time home buyer to be eligible for some, but not all, low down payment loans.
- Debt to Income Ratio – Loans will have a max debt to income ratio, or DTI ratio, that capts the value of the home loan in relation to your income. It may be a set number, or adjustable based on your credit score.
- Income – Because many of these loans are designed to assist borrowers who are otherwise unable to afford a home, there are often income caps based on the area where you are buying. A minimum income may also apply.
Because there are so many factors across the various loan types, Landrum Loans works with you from the beginning. We use the information you provide about your financial situation and home buying goals to determine which loan you may qualify for and will provide the best value.
Pros of a Low Down Payment Loan
The primary benefit of these loans is the more affordable down payment. For many borrowers, mortgage approval is only possible with one of these loans since the downpayment on most conventional loans is more than they can afford. A low down payment loan can make it possible to purchase a home in a more expensive city, like Sacramento, Dallas, Denver, Phoenix, and other metro areas, for those who otherwise would not be able to save the necessary down payment.
With certain types of low down payment loans, there may be additional benefits. FHA loans, for instance, can have lower interest rates for poor credit borrowers than conventional loans and are easier to qualify for because the funds are government-backed.
Challenges of a Low Down Payment Loan
The low down payment and ability to get approved is a trade off. While it opens up financing options for you, it comes at the cost of:
- Larger Loan Balance – Paying less in a down payment will require you to take out more in the loan to cover the cost of the home. In addition to larger payments to pay this amount off, you will pay more interest as well.
- Required PMI – Private mortgage insurance is required on most loans with less than a 20% down payment. This is an additional monthly expense you will pay to offset any risk to the lender until you reach 20% equity in your home, or for the life of the loan for FHA loans.
- Possible Higher Interest Rates – Because putting less down makes you a riskier borrower in the eyes of lenders, some lenders may charge more for these types of loans. Luckily, because most of these loans are backed by the government, most are still able to offer very low interest rates.
All of these factors could lead to greater costs. Depending on the cost of your home, not paying 20% down can cost hundreds of dollars extra over the lifetime of your loan. While this is not necessarily a reason to forgo a low down payment loan, it is something we will consider with you to help you feel confident that you are choosing the best value loan type for your finances.
Contact Landrum Loans to Discuss Your Low Down Payment Loan Options
Not having the savings for a 20% down payment does not mean that homeownership is out of your reach. Government programs and other alternatives to conventional loans make it possible for many families to afford the home of their dreams, and Michael Landrum at Landrum Loans can be the partner you need in home financing. Call Michael today at (916) 813-9306 to get started.