As the country recovers from a housing bust made worse by the popularity of low down-payment mortgages during the last housing boom, homebuyers with little money for a down payment are finding more home loans available for little or even no money down.
The Federal Housing Administration insures loans with small down payments. And private mortgage insurers have lowered their down payment requirements.
It’s possible to get a mortgage today with no money down from several different sources. The following are a few of the options available for borrowers seeking low down-payment and zero down-payment home mortgages:
VA loan ($0 Down)
Veterans Affairs (formerly the Veterans Administration) guarantees no-down purchase mortgages for qualified veterans. Private lenders originate VA loans, which the VA guarantees. There is no mortgage insurance. The borrower pays a funding fee, which can be rolled into the loan amount.
The VA funding fee varies, depending on whether the veteran served in the regular military or in the Reserves or National Guard, and whether it’s the veteran’s first VA loan or a subsequent one. The funding fee can be as low as 2.15 percent or as high as 3.3 percent.
Some lenders don’t originate VA Loans, so be sure to speak with a mortgage professional regarding your options with this type of funding.
Navy Federal Credit Union ($0 Down)
Navy Federal Credit Union, the nation’s largest in assets and membership, offers 100% financing (up to $650,000) to qualified members for buying primary homes. Credit union eligibility is restricted to members of the military, some civilian employees of the military and U.S. Department of Defense, and family members.
Navy Federal resumed zero-down financing earlier this year after a hiatus of a couple of years. The credit union’s zero-down program is similar to the VA’s. One difference is cost: Navy Federal’s funding fee of 1.75 percent is less than the VA’s funding fees.
Department of Agriculture ($0 Down)
The Department of Agriculture’s Rural Development mortgage guarantee program is so popular that it ran out of money this spring. Congress is expected to release more funding.
Some borrowers are surprised to find that Rural Development loans aren’t confined to farmland.
The USDA has maps on its website that highlight eligible areas. In addition to geographical limits, the USDA program has restrictions on household income, and it’s intended for first-time buyers, although there are exceptions.
The USDA mortgage comes from a bank, and there is no mortgage insurance. Instead, the USDA levies a 2 percent guarantee fee, which can be rolled into the loan amount.
For information on this program or to check your availability, visit the USDA’s website by clicking here.
Federal Housing Administration (Low Down Payment)
As you can tell, the zero-down options listed above are restricted to limited groups of buyers. For the general public, with a minimum down payment of 3.5% percent, the Federal Housing Administration is the low-down payment option that’s available to the most people.
About 30% percent of today’s home loan borrowers get FHA-insured loans. (That’s up from 3 percent during the housing boom). The FHA gained market share after many other low-down-payment options (such as piggyback loans) evaporated in the housing bust.
Losses to the insurance fund compelled the FHA to hike rates. The FHA charges an upfront premium of 2.25% of the mortgage amount. On a loan with the minimum down payment, there’s an annual premium of 0.55% of the mortgage amount, or $550 a year for each $100,000 borrowed.
Another Low-Down-Payment Option
There is another option for borrowers in the “low-down-payment” arena. A standard home loan with private mortgage insurance.
A number of companies offer private mortgage insurance for home loans with down payments of less than 20 percent. PMI is not the same thing as FHA insurance, a form of public mortgage insurance.
Typically, monthly private mortgage insurance costs more than FHA insurance for borrowers who put down 5 percent. However, PMI costs less than FHA for loans with down payments of 10 percent or more.
Private mortgage insurance has another edge over FHA: Under certain conditions, you can cancel PMI earlier — as soon as two years after you get the loan, compared to a wait of at least five years to cancel FHA insurance.
PMI has become easier to get. From the start of the housing bust until just recently, mortgage insurers slapped a “declining market” label on the worst-hit housing markets and required minimum down payments of 10 percent or more, instead of the traditional minimum of 5 percent.
Now, at least some of the insurers have relaxed the requirements, even in hard-hit states such as Arizona, California, Florida, Nevada and Michigan.
These are just a few of several programs now available. With the mortgage industry adjusting daily, I’ll be sure to keep you posted to additional programs as they become available. To be sure you receive the latest updates on the ever-changing real estate industry, be sure to sign up for my email newsletter.