Know Your Options: Getting an Affordable Home Loan With Little or No Money Down
Owning a home is part of the American Dream. If you don’t have a sizable down payment, take heart – there are loan programs that can help.
Many people dream of owning a home, but coming up with enough money for the down payment can be a major obstacle
The good news is you might not necessarily need a big down payment — or even any down payment — to buy a home. There are several different low and no down payment mortgage options on the market today.
“With these options, coming up with a down payment doesn’t necessarily have to be an insurmountable obstacle to buying a home,” says Cadence Bank Mortgage Loan Originator Lisa Daniel.
Mortgage down payments explained
Homebuyers are usually required to pay a percentage of the total mortgage amount upfront when they close on the house; this is referred to as the down payment. Making a down payment reduces the size of the mortgage, which also reduces the amount of the monthly payment.
A common down payment amount is 20 percent of the home price. So if you bought a home for $200,000, you would make a down payment of $40,000, which would leave you with a mortgage of $160,000. Making a down payment of 20 percent or more will generally result in a lower mortgage interest rate and better loan terms and conditions.
Of course, you can make a down payment larger than 20 percent if you want. For example, if you made a 50 percent down payment on a $200,000 home, your mortgage would be $100,000.
Making a smaller down payment
You may be able to obtain a mortgage with a down payment of less than 20 percent. “Some mortgages are even available with zero percent down payments for homebuyers who qualify,” says Daniel. These are sometimes referred to as 100 percent financing loans.
Keep in mind, however, that if you buy a home with a down payment of less than 20 percent, you may have to buy private mortgage insurance (or PMI) on the loan. This is insurance that protects the lender from default — but that you have to pay for.
PMI generally costs from 0.5 percent to 1 percent of the loan balance. Since this is tacked onto your mortgage payment every month for the life of the loan, it can really add up over time.
Types of low and no down payment mortgages
According to Daniel, there are several different types of low and no down payment home loans:
- Federal Housing Administration (FHA) home loans. FHA home loans are the most common type of low down payment loan.
The FHA itself doesn’t loan the money; rather, it insures loans made by private lenders, such as commercial banks. Each lender sets its own rates and terms for FHA home mortgages.
- United States Department of Agriculture (USDA) home loans. The USDA Rural Development Guaranteed Housing Loan Program makes 100 percent financing mortgage loans to borrowers who want to buy homes located in rural areas as defined by the USDA.
"This is a great option for many homebuyers who are having trouble saving up for a down payment,” says Daniels. To qualify, your annual household income must not exceed the maximum income requirement for the county where the home is located.
- United States Department of Veterans Affairs (VA) home loans. These mortgage loans help military veterans, active duty military members, reservists and spouses of deceased military members who have not remarried buy a home with a low or no down payment.
The Department of Veterans Affairs guarantees home mortgage loans made by private lenders. Since VA loans are backed by the U.S. government, they don’t require the purchase of PMI when less than a 20 percent down payment is made.
- Conventional home loans. Daniels notes that some conventional home loans may also permit low down payments for homebuyers who meet the bank’s qualification criteria.
To qualify for a low down payment conventional mortgage, you’ll likely need a relatively high credit score and a stable job history, Daniel adds.
For more information on getting a mortgage
Please contact Cadence Bank if you have more questions about low or no down payment mortgage loan options.
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.