Government Backed mortgage loans
Low Down Payment Conventional Loans
Year after year, home buyers cite "the down payment" as their biggest obstacle to homeownership. Yet, in many parts of the country, you can buy a home with no money down.
In fact, there are entire loan programs created specifically to help home buyers get into a home with as little down as possible.
So, why do home buyers still think they need twenty percent down?
Plus, through the use of housing grants (which are available in many U.S. cities), buyers can have a small down payment gifted to them by the municipal government of a region, so long as that buyer will agree to live in the home for five years or longer.
And, then there's the conventional mortgage loan.
Often overlooked because it's linked to loans requiring twenty percent down, the conventional loan program offers multiple low-down payment mortgage options to first-time home buyers and repeat buyers; and mortgage rates are typically excellent.
Conventional Loan vs Government Loans
There are dozens of mortgage loans available to home buyers today. In general, though, mortgages can be divided into two broad categories - government-backed loans and conventional loans.
Government-backed loans are loans for which mortgage lenders are protected against loss via government insurance program.
The most common government-backed loan is the FHA loan, which is insured by the Federal Housing Administration. FHA loans got their start in 1934, and helped to reboot the U.S. housing market after the Great Depression.
FHA loans worked so well that the Department of Veterans Affairs sponsored a similar program for military personnel returning from war in 1944.
With the creation of the G.I. Bill that year, the VA Home Loan Guaranty program was established, which guaranteed lenders against loss on mortgage loans made to veterans.
Then, the USDA Rural Housing Program was launched.
Meant to help home buyers settle less-populated parts of the county, the U.S. Department of Agriculture launched its flagship 100% financing program and provides insurance to lenders making USDA loans.
By contrast, conventional loans are not backed by the government.
Conventional loans are backed by Fannie Mae and Freddie Mac, and these two agencies exist solely to help banks make mortgage loans. They offer no mortgage insurance to lenders, leaving that task to private mortgage insurance (PMI) companies.
In today's market, conventional mortgages account for more than half of all mortgage loans made; and, according to conventional mortgage guidelines, PMI is required when a borrower's loan-to-value is above 80% (excepting for the HARP mortgage refinance).
This is likely why buyers think you have to put 20% down on a home. Conventional loans are the most prevalent of all loan types and PMI comes into play with down payments of less than twenty percent.
People seem to think PMI is a waste of money.
Conventional Low Down Payment Options
When you want to purchase a home and don't want to make a large down payment, you can look beyond just the FHA, VA, and USDA home loan programs.
There are low down payment conventional loans, too.
3% Down: The Conventional 97
The Conventional 97 mortgage allows for a down payment of just three percent. The program requires that you purchase a single-unit home, and that you borrow no more than the national mortgage loan limit - "high-cost" mortgages do not apply.
Down payment monies may be gifted from a family member with the Conventional 97 and private mortgage insurance is required.
3% Down: The HomeReady™ Mortgage
The HomeReady™ mortgage is the newest low down payment conventional mortgage loan.
Originally meant for multi-generational households where parents, children, and grandparents all share a home, the HomeReady™ home loan can be used by anyone, based on where you live.
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I agree with Michael Cheng. If you have a great credit score, stable, verifiable income, verifiable cash on hand or assets, you are a dream client. By comparison shopping, you will be able to obtain a Loan Estimate from at least three different types of lenders: Talk with the mortgage department of where you currently bank. You already have a banking relationship with them. This is a good place to start. Next, apply with a local, licensed non-bank mortgage lender. Somebody located in the town in which you live. Last, apply with a local mortgage broker.