Buying a home will likely be the biggest investment of your life. From the down payment to closing costs to mortgage insurance and furnishing your home – the expenses of buying a home can add up quickly. Luckily, there are several home loan options that make the home buying process more affordable by lowering these costs.
- FHA Loans are the most popular type of government-sponsored mortgage, backed by the Federal Housing Administration (FHA) with lenient credit requirements and down payments as low as 3.5%.
- VA Loans are a special government home loan backed by the U.S. Department of Veteran Affairs (VA) with no down payment requirements for eligible veterans, reservists, active-duty personnel, National Guard members, and surviving spouses of veterans.
- USDA Loans are backed by the United States Department of Agriculture (USDA) with no down payment options for home buyers in select rural and suburban regions.
- The Good Neighbor Next Door program, a government sponsored loan offered by HUD, helps eligible law enforcement officers, teachers, firefighters, and emergency medical technicians with a 50% discount off of their home purchase.
- The Fannie Mae HomeReady® Loan and Freddie Mac HomePossible® Loan are affordable conventional home financing options with low down payments (3% to 5%), flexible financing, and cancellable mortgage insurance.
Challenges home buyers face when qualifying for a mortgage
The mortgage approval process looks at many different components of the potential home buyer’s financial profile. Some buyers might have a great credit history, but simply not enough income to finance a typical 20% down payment. Others may be in the process of rebuilding their credit and not be able to meet the stricter credit requirements for conventional home loans.
Life is unpredictable, and you have to pay unexpected medical expenses that can have a lasting impact on your credit score or debt-to-income ratio. No matter what your financial struggles are, there are many home loan options that could help you reach your home buying goal.
Home loans with low down payment options
The FHA Loan is the most popular type of government-sponsored mortgage. Backed by the Federal Housing Administration (FHA), this type of loan is less of a risk for lenders because it is insured by the federal government. Therefore, lenders can offer the FHA Loan with more favorable terms and more lenient qualification requirements.
Some of the FHA Loan benefits include:
- Lenient credit score – FHA Loans allow for a minimum credit score of 500, unlike the typical conventional loan minimum of 620.
- Low down payment options – Qualifying borrowers can put down as little as 3.5% on their home. To qualify for this option, you need a credit score of 580 or above, but credit scores between 500 and 579 are eligible for a 10% down payment option.
- Lenient debt-to-income (DTI) ratio – To calculate your DTI percentage, you need to add up all of your recurring monthly debts (student loans, credit card payments etc.), divide that total by your monthly income after taxes, and convert that figure to a percentage. The lower the DTI the better, but FHA Loans are generally more forgiving with DTI.
- DACA recipients welcome – DACA recipients who are legally permitted to work in the U.S and can present their Employment Authorization Document (as well as pass all other qualifications required by U.S. citizens) are accepted.
Additional factors to consider when financing with an FHA Loan are your property type and mortgage insurance premium (MIP). Unlike conventional loans, FHA Loans must be used to finance a primary residence. You also need to pay a MIP, which is similar to private mortgage insurance (PMI) for conventional loans. The initial MIP funding fee is 1.75% of your home’s price and the recurring annual fee is between 0.45% and 1.05% of your loan amount.
The VA Loan is a special government home loan that is backed by the U.S. Department of Veteran Affairs (VA) and available to eligible veterans, reservists, active-duty personnel, National Guard members, and surviving spouses of veterans. There are many benefits to financing your home with a VA Loan, including:
- No down payment requirement – Unlike conventional loans and FHA Loans, the VA Loan has a 0% down payment option, which can be used as long as the sales price isn’t higher than the home’s appraised value.
- No monthly insurance premiums – While conventional loans require mortgage insurance until you reach 20% equity and FHA Loans require mortgage insurance no matter what, the VA Loan requires no mortgage insurance.
- Better loan terms and interest rates – Compared to other types of loans, the VA Loan generally offers more competitive interest rates and more lenient terms.
- Fewer closing costs – Sellers have the option to finance some of your closing costs, decreasing the amount you pay.
Aside from being a qualified veteran, reservist, active-duty personnel, National Guard members, or surviving spouse, there are hardly any other restrictions to the VA Loan. You must be financing a single-family, primary residence home, and remember to provide your Certificate of Eligibility (COE), which shows your lender that you are qualified to receive VA Loan funding. To apply for your COE, you can fill out a form online, send a Request for a Certificate of Eligibility by mail, or talk to us. Lastly, the VA Loan requires a funding fee, which is a one-time fee that helps lower the cost of the loan for U.S. taxpayers that ranges anywhere from 0.5%-3.3% of your loan amount.
Backed by the United States Department of Agriculture (USDA), the USDA Loan is an affordable home financing option available in select rural and suburban regions. To qualify for a USDA Loan, you must:
- Be financing a USDA-eligible property – Properties are only eligible for USDA Loans if they are located in certain areas. Additionally, the property must be a primary residence, and you must be living in the home.
- Meet the income limits in your area – USDA Loans are only available for households with certain incomes. To check the income limits in your area, view the USDA income chart.
- Meet other eligibility standards – As with most other loans, you will need to provide proof of income, be a U.S. citizen, have an acceptable credit history, and meet our USDA DTI requirements.
Financing your home with a USDA Loan gives you advantages like a 0% down payment – which could save you thousands of dollars in upfront funding costs.
Good Neighbor Next Door Program
Through the Good Neighbor Next Door program, a government-sponsored loan offered by HUD, eligible law enforcement officers, teachers, firefighters, and emergency medical technicians can receive a 50% discount off of their home purchase. To qualify for the discount, you must:
- Be a qualifying law enforcement officers, teachers, firefighters, or emergency medical technician.
- Purchase a single-family home located in a revitalization area and listed through the Good Neighbor Next Door Sales program.
- Sign a second mortgage and note for the discount amount.
- Live in the home for a minimum of three years after your purchase.
Fannie Mae HomeReady® Loan
The HomeReady Mortgage is another affordable home loan option offered by Fannie Mae (through private lenders) for low income families looking to buy or refinance. Whether you’re a first-time home buyer that needs a little home financing boost or a current homeowner looking for a low-cost refinance opportunity, the Fannie Mae HomeReady can help meet your needs. Benefits of financing with the HomeReady mortgage include:
- Low down payment options – 3% down payment options available.
- Cancellable mortgage insurance – Once you have built at least 20% equity, you can cancel your mortgage insurance.
- No geographic restrictions – Unlike USDA Loans and other affordable home loan options, the HomeReady Mortgage is not limited to certain areas of the country.
- Flexible funding – Receive financing assistance from down payment gifts
- Lenient co-borrower requirements
Check your income eligibility on the Fannie Mae Website to get started.
Freddie Mac HomePossible® Loan
The Freddie Mac HomePossible® Loan is similar to the Fannie Mae HomeReady Loan. Like the Fannie Mae HomeReady Loan, the Freddie Mac HomePossible Loan is an affordable home financing option for primary residences that offers:
- Low down payment options from 3% to 5%
- Flexible financing including rental property income, and cancellable mortgage insurance
- No upfront funding fees
- Credit score of 620 or above, and make sure you are financing your primary residence.
Flexible Home Loans for All Income Levels
Your mortgage should not be one-size-fits-all. There are several loan programs that can help you reach your home buying goal, and several other forms of assistance, like the down payment gifting platform, HomeFundIt™.
Before you apply for your home loan, try to improve you’re your credit score, lower your DTI as much as possible, and have a down payment plan ready to go. Then, contact us to explore your different affordable home loan options.