Investigate Every Avenue in This Competitive Market
Considering all of the down payment options available is essential if you’re looking into buying a new home now or in the near future. Many homebuyers have found themselves on the wrong side of a bidding war after putting in an offer on a house in recent months, which underscores how competitive the market is.
Here’s more information on the kind of market homebuyers are dealing with. According to Realtor.com, median home prices across the country are up 12.7 percent over this same time last year. While prices have increased, the national housing inventory has not and, in fact, remains near record-low levels. Higher prices and low inventory have only stoked the competitive fires; The average time on market is nearly 50 percent lower than in 2020.
With the market more competitive than ever and prices increasing, it’s imperative that homebuyers do whatever they can to find ways to save on their mortgage. Historically, one of the greatest barriers to buying a home has been the down payment, with most assuming they’ll need anywhere from 5 to 20 percent of the sale price.
However, there are a variety of programs that allow homebuyers to make a 3 or 3.5 percent down payment (of the sale price) and — depending on your background and location — some loan programs will allow you to make no down payment at all. These lower percentages will make homeownership possible for more people. For example, on a $250,000 home, a $7,500 down payment option (3%) is much more accessible than a $12,500 (5%), $25,000 (10%), or $50,000 (20%) down payment.
Today, we’ll go over some of the down payment options available to you in this quick primer.
Essential Down Payment Options
FHA Home Loans
FHA home loans are offered by mortgage lenders and backed by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD). With low down payment requirements and other flexible qualifications, it’s a popular program for first-time buyers and those with difficult financial backgrounds.
Requirements include a 3.5% down payment, upfront mortgage insurance premium of 1.75%, and monthly mortgage insurance of 0.80–1.05%. You’ll need a minimum credit score of 580 to qualify and the home must be your primary residence — meaning it’s where you will be living. Gift funds from relatives, employers, and others can be used for the down payment.
FHA home loans are available as a fixed-rate loan or an adjustable-rate mortgage (ARM) and can be coupled with down payment assistance programs. You may be able to negotiate with the seller to pay up to 6% of your closing costs, and this down payment option can be used for multi-family homes if you’ll be living in one of the units.
VA Home Loans
Offered by mortgage lenders and backed by the U.S. Department of Veterans Affairs (VA), VA home loans are available to those who served in the Armed Forces, are another qualifying service member, or are a surviving spouse or relative. This program provides extremely favorable terms such as no down payment requirement and generally lower interest rates than other loan programs.
You must meet certain service criteria to qualify for the program, and a Certificate of Eligibility will be required (your lender can help you obtain this). There is no down payment required for VA home loans, no monthly mortgage insurance requirement, and flexible credit score requirements. There is a VA funding fee, ranging from 1.4 to 3.6% based on loan type, loan amount, and whether you’ve used a VA loan before. Gift funds can be used. Available as both a fixed-rate loan and an ARM, this loan is reusable for future home purchases and refinancing. You may be able to negotiate with the seller for up to 4% of your closing costs. It can be used for single-family residences, new construction, approved condos and townhouses, and even manufactured/mobile homes. Multi-family homes can also be targeted if you’ll be living in one of the units.
Fannie Mae HomeReady®
This program is an ideal solution for credit-worthy borrowers that may have lower incomes and need assistance in purchasing a home without making a traditional down payment of 5, 10, or 20 percent.
The required down payment is just 3%, and while mortgage insurance paid by the borrower is required, it can be canceled at 80% loan-to-value. A minimum credit score of 620 is required and your income cannot be higher than 80% of the area median income (AMI). At least one borrower on the loan must also take homeownership education. Gift funds, grants, and down payment assistance programs can be used. HomeReady options are available as both fixed-rate loans and ARMs and can be used for all the same kinds of homes as the VA home loan program.
Freddie Mac Home Possible®
Similar to the Fannie Mae program, the Freddie Mac version provides low-income and very low-income borrowers with the opportunity for flexible financing for a home purchase. It features a 3% down payment and other significant advantages to open up homeownership to more people.
Like its sister program, Home Possible requires mortgage insurance paid by the borrower, but it can be canceled at 80% of loan-to-value. Your income cannot be higher than 80% of the AMI and you will need to have a median FICO credit score of 620 or better. Gifts funds can be used. In addition, you can use a non-occupying co-borrower to help you qualify for the loan. This down payment option is available for single-family residences, multi-family homes up to four units, approved condos, planned urban developments, and manufactured homes.
USDA Home Loans
Offered through private mortgage lenders and provided by the Rural Development office under the U.S. Department of Agriculture (USDA), this flexible home loan program is designed to make homeownership more accessible for those who live in rural areas. If you live in a qualifying area, you’ll gain access to $0 down payment requirements and other flexible benefits. Note that not all homes will qualify for this program. You can use this tool to find out if the home you’re interested in qualifies for the USDA home loan program.
While there is no monthly mortgage insurance requirement, an upfront guarantee fee of 1% is needed, and an annual fee of 0.35% is also required. You must use the home as your primary residence, and gift funds can be used. You’ll need a credit score of around 640 to qualify, and your income cannot exceed 115% of the AMI. These down payment options are only available as 30-year fixed-rate mortgages, with no ARMs. You’ll also be able to refinance your USDA loan via a USDA Streamline Refinance later if desired.
JFQ Lending, Inc. Will Help You Navigate Down Payment Options
Founded in 2017 by CEO John Joseph Kresevic (NMLS #142818) and COO Justin Meek, JFQ Lending, Inc. is a home purchase and refinance lender headquartered in Scottsdale, Arizona. With more than 700 professionals, JFQ Lending, Inc. is dedicated to helping customers find the right loan program for their needs.
Kresevic is a recognized leader in supporting countless homebuyers and homeowners, and has helped JFQ Lending, Inc. experience exponential growth over the last four years with a more efficient, agile, and impactful, employee-focused company.
If you’re wondering which of the loan programs discussed here can help you, connect with JFQ Lending, Inc. today to learn more about these programs and other solutions that will make your dream of affordable homeownership a reality.