Are you buying your first home? You may be surprised to learn that you have more options than a conventional loan with a 20 percent down payment. And that’s good news if you can’t afford to make a large down payment.
Instead, you may want to take advantage of a government-backed, non-conventional loan that will allow you to buy a house with little or no down payment and/or less-than-perfect credit. If you’re a low- to middle-income borrower, you may even qualify for down payment assistance. Here are the financing options you need to know about to get your best mortgage loan.
Get the Best Mortgage Loan for You
Fixed vs. Adjustable Interest Rates
When you start shopping for a mortgage, you’re going to encounter two basic loan types: fixed rate and adjustable rate. In a fixed rate loan, the interest rate (and therefore your payment) stays the same throughout the life of the loan. Fixed rate loans are the best option if you plan to live in the house for the long term, and especially if you don’t think your budget can handle a mortgage payment that can grow or shrink, depending on federal interest rates, changes in your credit score, or missed or late payments.
In an adjustable rate mortgage, you’ll start out with an interest rate that remains fixed for a period of time, usually one to 10 years. After that period elapses, your mortgage interest rate will reset periodically – usually once a year, but sometimes more often, depending on your mortgage agreement. You can usually get a much lower up-front interest rate on an adjustable rate loan, but when your initial rate period ends, your interest rate and mortgage payments can balloon significantly. An adjustable rate mortgage is usually best if you plan to sell in five to seven years. However, you can’t predict what will happen to the real estate market. You should know that you may not be able to sell your house as fast as you’d like to, and you may not get as much for it as you’d hoped.
Conventional mortgage loans are guaranteed by private lenders and by the government sponsored mortgage lenders, Freddie Mac and Fannie Mae. They typically require a strong credit score and a down payment of 20 percent. However, you can usually get a conventional loan with a smaller down payment – as low as 3 percent – if you’re willing to pay for private mortgage insurance.
Conforming vs. Non-Conforming Loans
A conforming loan is a loan that meets criteria established by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). Conforming loans can be packaged and resold on the secondary mortgage market, so lenders tend to prefer them. They also offer lower interest rates than non-conforming loans. However, there’s a limit to how much you can borrow – $647,200 for 2022, or $970,800 if you live in a high-cost market like New York or San Francisco.
Non-conforming loans don’t meet the criteria established by the FHA, Fannie Mae, and Freddie Mac. They’re usually issued by private lenders who establish their own criteria for borrowers. You may be able to borrow more than the conforming loan limit. However, you may also need to make a bigger down payment, have better credit and a lower debt-to-income ratio (DTI), have larger cash reserves, pay higher closing costs, and perhaps pay a higher interest rate.
If you don’t qualify for a conventional loan due to poor credit, or you can’t afford a large down payment (or any down payment), you should look into government-backed loans from the FHA, the Veterans Administration (VA), or the U.S. Department of Agriculture (USDA). These loan products are guaranteed by the government, with the goal of helping more people achieve home ownership.
FHA loans are available to borrowers with a credit score of at least 580, a DTI of 43 percent or lower, and a down payment of at least 3.5 percent. Borrowers with a credit score as low as 500 can get an FHA loan with a 10 percent down payment. FHA loans do require private mortgage insurance for all borrowers.
If you’re a veteran, retired military service member, active duty service member, or surviving spouse of a service member who was killed in action or died from a disability acquired during service, you can qualify for a VA-backed loan. You can get a VA loan with no down payment.
USDA loans are also available with no down payment. The catch is that you have to buy a home in an approved rural or suburban region. So, if you want to live in a metro area like Virginia Beach, mortgage lenders won’t be able to give you a USDA loan (although you may be able to qualify for an FHA loan). However, if you want to get out of the city a little ways, a USDA loan could be for you.
Down Payment Assistance
Of course, all the loan options in the world won’t be enough to get you into a house if you can’t come up with the down payment lenders require. If you want to buy a home but can’t afford a down payment, don’t despair. There are down payment assistance programs available in every state to help low- to middle-income borrowers. Many of them come in the form of grants that don’t have to be repaid, while others come in the form of a second mortgage that can be forgiven as long as you make a certain number of on-time payments on your primary mortgage. You may be able to qualify for assistance to offset closing costs, too.
Purchasing a home is about more than just putting down roots. Your home purchase will help you build wealth in the form of equity, and give you something to pass down to the next generation. With all the mortgage products available to borrowers today, a home may be more accessible than you realize. Start looking for lenders today, and you could be a brand new homeowner before you know it.