There’s a common misconception that you need to save for years before buying your first home and that a mortgage requires a 20% downpayment commitment. While some do, there are quite a few other options.
Buying and owning a home is costly enough, so you don’t want to dedicate every penny you have to upfront expense. Here are some options for lower down payments than the typical 20% on a conventional mortgage.
No Downpayment Options
There are several no downpayment mortgage options that allow first-time home buyers and repeat purchasers to buy a home while only contributing closing costs.
VA Loans (0% Down)
When it comes to no downpayment mortgages, the most popular option is a VA loan, which is guaranteed by the U.S. Department of Veterans Affairs. You may be eligible if you or a spouse are active duty or honorably discharged service personnel. Poor credit won’t necessarily disqualify you from this loan.
USDA Loans (0% Down)
The U.S. Department of Agriculture offers 100% financing to eligible purchasers. Borrowers must have stable income at a certain level, a minimum 640 credit score, and the home must be in a qualified rural area.
Low Downpayment Options
If you don’t qualify for a no downpayment option or would like to start out with some equity in your home, there are several choices in low downpayment mortgages.
Conventional Loan (3% Down)
Available from Fannie Mae and Freddie Mac, the Convention 97 mortgage allows lenders to accept just 3% down, which can come from a variety of sources. The mortgage must be a fixed-rate loan, and there is no minimum credit score requirement.
HomeReady Mortgage (3% Down)
The HomeReady Mortage is backed by Fannie Mae and is generally available from most major U.S. lenders. These mortgages not only offer below-market interest rates but also allow borrowers to put just 3% down and use all household occupant’s income to qualify.
FHA Loans (3.5% Down)
FHA loans are popular choices because they allow for a reasonably low (3.5%) downpayment, and the minimum credit score permitted is only 500.
“Piggyback Loan” (10% Down)
If you have an above-average credit score but don’t want to commit a lot of cash upfront for a home purchase, you might qualify for a piggyback loan program. This is essentially two loans structured as 80/10/10.
The “80” is the first mortgage, which is typically a conventional loan via Freddie Mac or Fannie Mae. The next “10” is a second mortgage that is structured like a home equity loan or home equity line of credit (HELOC). The last “10” is the cash downpayment you make at closing.
Understanding PMI
If you choose a mortgage with a no downpayment or low downpayment option, the lender may require that you carry private mortgage insurance (PMI). This protects the lender in the event of foreclosure.
PMI will add to the cost of your loan, but you will only have to pay it for a few years. Once you have roughly 20% in home equity, you can ask that the lender remove the PMI requirement.
Are You Ready to Buy a Home in Lexington?
Now that you have more information about downpayment options for mortgages, you might feel more comfortable moving forward with your purchase. If you’re looking for a home in Lexington, SC, The Lafayette Team can help.
Located in Lexington, SC, our group of knowledgeable and successful residential real estate professionals is standing by to provide support for your upcoming purchase. Contact us today to tell us more about your goals for homeownership.