What Are Some Low Down Payment Mortgage Options?

There are many misconceptions about mortgage down payments. How much do you need to put down? Are there low down payment mortgage options? To get the answer to these and other questions about low down payment mortgages, we contacted D. Shane Whitteker, owner and chief mortgage broker at State College mortgage company Principle Home Mortgage.  

Do I need to have a 20% down payment in order to buy a home? 

According to Whitteker, the ‘must have 20% down’ idea is an erroneous assumption.  

“This is a common misconception for prospective homebuyers,” Whitteker says. “There are a number of options for a lower down payment than 20%. FHA loans allow for a down payment of 3.5%, a USDA Rural Housing mortgage allows for no down payment, VA mortgage loans allow for no down payment, and conventional allows for a minimum of a 3% down payment.” 
 
Although some conventional mortgage loans require 20 percent down to purchase a new home, there are many types of home loans that allow you to pay less for the down payment. In this instance, you can save less money to put towards the down payment, which can make it easier to become a homeowner quicker. Lenders will typically require you to pay for private mortgage insurance if you put less than 20 percent down because you're more of a risk as a borrower. 
 
What is a government backed loan? 
 
"This is typically referring to FHA, VA, or USDA financing,” Whitteker says. “These three products have insurance programs that are provided to the lending bank from the government.  This insurance is similar to private mortgage insurance on a conventional loan.  The insurance gives the lending bank the incentive to lend with a much lower down payment than would exist without the insurance coverage.” 
 
There are many different types of government-backed loans, which include USDA loans, FHA loans, and VA loans.  
 
What are some advantages of putting down more money on a home? 
 
There are many reasons a prospective homeowner would want to put down more money on a home, which includes obtaining a lower interest rate.  

“The first benefit is obvious: your principle and interest payment will be lower. Next, you may end up with a lower mortgage insurance factor resulting in lower or no mortgage insurance premium,” Whitteker says.  

Credit problems in your history? Whitteker says a larger down payment may help you get a home mortgage.  

“If you are a borrower with past credit issues you may be more likely to get approved with a larger down payment,” Whitteker says. “For example, if your credit score is lower than a 580 middle score, FHA will require a minimum of 10% of the purchase price of the home as a down payment.” 

Lenders are happy to reduce the interest rate they charge you on the loan if you put more money down. More money down also means you have a lower monthly payment with your mortgage, which means you can afford a home with a higher value. A larger down payment also means you don't have as much to pay off on the house. 
 
Does an FHA loan require a larger down payment than a conventional mortgage? 
 
FHA loans typically require a down payment of 3.5 percent, and a convention mortgage requires a down payment of three percent. You'll need to plan to save more money for an FHA loan to ensure your application is approved. FHA loans require a minimum credit score of 580 for the lowest down payment, but convention loans require 620. For 2021, there's a loan limit of $356,362 for FHA loans and $548,250 for conventional loans. A conventional loan will require private mortgage insurance if the down payment is less than 20%.  FHA will require mortgage insurance at any down payment level and may require the mortgage insurance be paid for the life of the loan.   

Does a VA loan require a big down payment? 

VA loans are unique because they don't require the borrower to have a down payment to use, which allows veterans to qualify more easily. If you've served in the military, you don't have to worry about saving enough money for a down payment and can buy a house immediately. You can also avoid high mortgage insurance fees for added savings throughout the year. 

“In general VA will finance up to 100% of the purchase price up to the conforming loan limit which is $548,250 for 2021,” Whitteker says. “If a veteran has had an entitlement charge in the past a down payment may be required for VA financing.” 
 
Keep in mind that if you don't put any money down for a VA loan, you'll end up with a higher monthly mortgage payment. This can limit the type of home that you can afford to purchase. 
 
How can I know if I qualify for a USDA loan? Who is this type of loan for? 

The main requirement for a USDA loan is that you must purchase a home in a rural or suburban area. This type of loan is created to benefit buyers with low to moderate incomes.  

A USDA loan is designed to help develop rural communities for middle to lower income families or individuals.  This loan type has income limits set by region and county on a per state basis.  They also list loan limits.  In order to qualify you would need to speak to a local mortgage broker or mortgage professional to have them complete your application and run the information through the government underwriting system (GUS).  If you don’t qualify that way you should ask your mortgage professional if you may qualify for a manually underwritten USDA loan. 

Contact your local mortgage broker to determine if the property you’re looking at is considered to be in a rural location before submitting your application. 
 
To qualify for a USDA loan, you must be a U.S. citizen or must be a permanent legal resident. Applicants are required to have a minimum credit score of 620 and prove that they have a stable income that is dependable and consistent.  
 
There are income limits that come with USDA loans, which means some people with higher comes automatically don't qualify. 
 
If I get a low or no down payment mortgage, what other expenses will I incur with a home purchase?
Can those be rolled into the loan? 
 
When you're looking to get a low or no down payment mortgage, there are other expenses that you'll be required to pay, which includes private mortgage insurance and closing costs. Private mortgage insurance is a condition of a conventional mortgage. This type of insurance is based on a factor that takes things like loan to value, credit score, debt ratio, etc into account.  The factor will typically range from .2 to 1.0 percent.  The factor is multiplied by your loan amount and divided by 12 to come up with you monthly mortgage insurance premium.  This calculation is done at the beginning of the mortgage on a conventional loan.  For USDA and FHA this calculation is done once per year based on your existing mortgage balance at the time of calculation.  What this means is that your MI payment decreases on a yearly basis for the USDA Rural Housing mortgage and the FHA mortgage. 
 
Mortgage insurance is required on conventional loans with less than a 20% down payment.  Mortgage insurance is always required on FHA and USDA Rural Housing loans and is never a monthly requirement for a VA mortgage.   
 
How much do I have to put down for a conventional mortgage? 
 
For a conventional mortgage, you can expect to pay at least three percent for the down payment. Those with lower credit scores or higher debt-to-income scores may be required to pay more for their down payment to secure the loan. A larger down payment may also be required if you're taking out a mortgage for a second home or are purchasing an investment property because you're considered to be more of a risk. 
 
Why do I have to pay a down payment when I get a mortgage? 
 
Prospective home buyers are required to pay a down payment because it lowers their loan-to-value ratio (LTV). The down payment reduces how much money you have to borrow and can make you less of a risk for lenders. It can also help you to avoid certain types of fees like private mortgage insurance. 
 
Down payments also ensure that the bank or financial institution has enough capital to lend a significant amount of money to each applicant. It also helps them recover part of the balance if the borrower defaults on the loan in the future. 
 
With your down payment, you're a less risky borrower, which means you can have access to a lower interest rate. This will allow you to save more money with your monthly payments on your mortgage. During the life of the loan, you'll spend less in interest if you initially pay a lower interest rate. You also have the option of refinancing your home to obtain a lower interest rate. 

To learn more about low down payment mortgage options that may work for you, contact State College’s mortgage broker, Principle Home Mortgage at (814) 308-0959.