When you’re in the market for a new home and you’re researching mortgages, you might see a lot of language like 15-year fixed, 30-year fixed, and 5/1 ARM.
These are different types of conventional mortgages — the traditional home loan that typically requires a 20 percent down payment.
While conventional mortgages are great for those with the resources available to make this sizable upfront payment, they’re not always the most feasible option — particularly for first-time homebuyers and those who require more flexible income and credit criteria to qualify for a loan.
Below are a few options that may help you get the financing you need with a lower down payment requirement.
FHA Home Loan
Federal Housing Administration (FHA) loans allows you to buy a home with a down payment as low as 3.5 percent. So, if the home you want costs $150,000, your 3.5 percent down payment would be just $5,250.
If you were to buy the home with a conventional mortgage, your 20 percent down payment would be $30,000.
Clearly, this is a major advantage if you want to buy a home, but your resources are limited. And you can even have a relative apply as a co-applicant to further increase your chances of qualifying for the loan. You’ll be required to pay a mortgage insurance premium, which is a fee that’s added to your monthly payment, but you might find that preferable to making a large down payment.
USDA Rural Home Loan
Similar to an FHA home loan, the USDA rural home loan is insured by the U.S. Department of Agriculture.
This means you can get more flexible financing toward the purchase of your new home. But the best part is that you can get up to 100 percent financing with a USDA loan. Yes, that means you don’t have to make a down payment.
The interest rate on the loan will be a 30-year fixed, so your monthly payment will be consistent throughout the life of the loan. Your closing costs can also be paid by the seller (though they don’t have to pay them) or included in the loan.
You don’t have to be a first-time buyer, either. You must meet certain income and credit criteria, and the property must be in a designated USDA rural area. Visit eligibility.sc.egov.usda.gov to find out if the home you want qualifies for USDA financing to get answers to your questions.
VA Home Loans
Last but certainly not least is the VA home loan — a program backed by the U.S. Department of Veterans Affairs that’s just for veterans and other service members. If you served in the Armed Forces or another qualifying organization, you can purchase a home with a competitive interest rate and up to 100 percent financing — all without having to pay mortgage insurance.
The benefits don’t stop there. If rates drop below the rate on your VA home loan, you may be able to refinance with a VA Interest Rate Reduction Refinance Loan (IRRRL) to lower your monthly payment and save even more.
USDA Loans
Borrower income limited to 115 percent of median income for the area. Borrowers must have reasonable credit histories. 30-year loan term. Housing costs cannot exceed 29 percent of income; total debt payments cannot exceed 41 percent of income. Homes must meet state and HCFP building codes. Funding fee required. Available only in designated USDA rural areas.
About the author — Roy Stevens has been in the home loan business since October of 2000 and has extensive experience and understanding of loans including; FHA,VA,USDA. Conventional, Purchase and Refinance.
