Homeownership is a huge part of American culture, and that’s great for first-time buyers — there’s a lot of help available via government and private home loan products.
Here are four mortgage programs ideal for first-time buyers – featuring low-to-no down payments and flexible underwriting.
- USDA (Rural Housing)
- 80/10/10 “Piggyback” loans
FHA offers several advantages for new buyers, but repeat buyers also use the program.
- The required down payment is just 3.5 percent, and it may be gifted or borrowed from an acceptable source.
- Borrowers can have FICO scores as low as 580 to qualify for a 3.5 percent downpayment. You still must demonstrate responsible debt management.
- Debt-to-income ratios (your monthly debt payments divided by your monthly before-tax income) can be as high as 50 percent.
- FHA loans are assumable, meaning a future buyer can take on your loan.
- Renovations and energy improvements can be wrapped into FHA loans.
For buyers with more money to put down and / or higher credit scores, FHA home loans may not be the cheapest option, and there are some disadvantages:
- The upfront mortgage insurance premium (which can be rolled into your loan) is 1.75 percent of your loan amount.
- Annual mortgage insurance premiums of .85 percent apply to most borrowers. This may be higher than private mortgage insurance with good credit.
- FHA mortgage insurance cannot be canceled, unlike private mortgage insurance.
- There are maximum loan amounts.
- Many condo projects are not FHA-approved.
Fannie Mae’s HomeReady program is a great conventional (non-government) program for those whose income meets eligibility guidelines. And if you buy in a low-income census tract, income limits are waived.
For everyone else, the maximum is equal to the area median income (AMI).
You can see if you’re eligible by checking the HomeReady Income Eligibility Lookup tool.
HomeReady is not limited to first-timers, but first-timers are required to complete an approved homeowner education course.
HomeReady’s advantages include:
- A minimum down payment of just three percent.
- Mortgage insurance premiums are discounted, and can be canceled once the loan balance has been sufficiently paid down.
- Flexible underwriting allows consideration of income from non-borrowing members of your household. You may also have a non-occupant co-borrower.
- Money for down payments and closing costs can be gifted or borrowed from approved sources.
- Manufactured housing is okay with five percent down.
There are no real disadvantages, unless you dislike the idea of completing homebuyer education. Note that Freddie Mac offers a very similar product called Home Possible, and it comes with the same advantages, and similar requirements.
The USDA (Rural Housing) mortgage is unique. To be eligible for USDA financing, a property must be located in a designated “rural” area. This means homes in many small- to medium-sized towns as well as suburban areas outside larger cities. The USDA’s property lookup tool lets you see if the home you want to buy is eligible for a USDA loan.
USDA loans also have income-eligibility guidelines. For the Guarantee program, in which the government insures your loan, your income cannot exceed 115 percent of the area median income. Borrowers with low or very low incomes (up to 80 percent of the AMI) may qualify for the Direct program, in which the USDA lends them money at subsidized interest rates as low as one percent.
Advantages of the Guarantee program include:
- No down payment is required.
- There are no limits on loan size.
- Closing costs and lender fees can be rolled into the loan if the home appraises above the sales price.
- Renovation / rehabilitation costs can be rolled into the loan.
- On October 1, 2016, the upfront guarantee fee will be reduced to one percent from 2.75 percent. Annual mortgage insurance will drop from .50 percent to just .35 percent.
- USDA loans are assumable.
The only real disadvantage of the program is that the annual mortgage insurance cannot be canceled as long as you have the loan.
“Piggyback” loans are not specific mortgage programs – they’re actually a combination of loans. Piggybacks allow homebuyers to avoid mortgage insurance by combining an 80 percent first mortgage with a “purchase money second” mortgage, typically, of 10 percent of the purchase price.
The name of the program refers to the percentage of the home’s purchase price for each component. An 80-10-10 loan, for example, means you have an 80 percent first mortgage, a ten percent second mortgage and a ten percent down payment. An 80-15-5 requires just five percent down.
The second mortgage is riskier for lenders because if the property must be sold in a foreclosure proceeding, the proceeds might not cover both the first and second loans, and the first loan takes precedence. For this reason, interest rates for second mortgages are higher.
Making A Decision
When comparing piggyback programs and other low-down-payment alternatives, analyze the total costs for the length of time you expect to own the home. A good loan officer or mortgage broker can help you compare options and choose the lowest-cost loan.