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4 Low Down Payment Mortgage Options

If you’ve been watching home prices rise during the p­andemic, you may feel priced out of the housing market. As of early October 2020, home prices were up 15% year-over-year, according to data cited by HousingWire. One workaround to this challenge may be to make a lower down payment. Many people think 20% is the norm, but most homebuyers pay much less. A 2020 National Association of Realtors® survey found that the median down payment among homebuyers they polled was just 12%. Among first-time homebuyers alone, it was even lower at 7%.

This is due to the variety of low and no down payment mortgage options available. Here’s a quick overview of four that we offer eligible buyers purchasing single-family homes. As an added bonus, some of these programs allow the use of gift funds toward down payments, which could further reduce costs for qualified borrowers.

1. FHA loan

Federal Housing Administration (FHA) loans offer down payments as low as 3.5%. These loans are popular with first-time homebuyers and buyers with credit issues because they tend to be easier to qualify for. They’re also known for:

  • Low closing costs;
  • No income limits, meaning they don’t cap how much borrowers can earn in order to qualify for a loan; and
  • Allowing non-occupying borrowers to be on loans, if they’re related to the main borrower. This means if you’re having trouble qualifying for a mortgage, an eligible family member can be a co-borrower on your loan even though they won’t live in your new home.

If you opt for this mortgage program, be aware that the FHA sets loan limits. These restrict the maximum homebuyers can potentially borrow and vary based on how affordable an area’s housing is. They’re also usually lower than what other mortgage programs offer.

Some things you’ll need to qualify for this loan with Mr. Cooper include:

  • A middle FICO score of at least 580.
  • Mortgage insurance—the FHA refers to this as a mortgage insurance premium (MIP) and there are two kinds required:
    • Monthly MIP: This cost will vary based on your down payment amount and can be reduced if you agree to a loan term of 15 years or less. It can also be removed after 11 years if you put 10% or more down. If you put less than 10% down, you’ll have to pay the MIP for the life of the loan.  
    • Upfront MIP (UFMIP): This fee is paid at closing and adds 1.75% to a home loan.
  • A property that can pass the FHA’s strict inspection guidelines.

2. HomeReady® mortgages

HomeReady mortgages are available through Fannie Mae and may require as little as 3% down. As with FHA loans, these mortgages allow non-occupant co-borrowers to help you qualify for your loan, but these borrowers do not need to be related to you. Loans with non-occupant co-borrowers cannot have a loan-to-value ratio of more than 95%, however, which means you’ll need to put at least 5% down. In the event you plan to live with a roommate or relative—such as a parent or adult child—they can also be co-borrowers if they qualify.

One requirement HomeReady loans have that FHA loans don’t is that borrowers must meet an income limit. This is because they were created with low-income homebuyers in mind. As of July 20, 2019, borrowers typically may not earn more than 80% of the area median income (AMI) based on where the purchased property is located. To compare potential limits, see Fannie Mae’s AMI Lookup Tool here.

Some things you’ll need to qualify for this loan with Mr. Cooper include:

  • A middle FICO score of at least 620.
  • Mortgage insurance, if you put less than 20% down.
    • The amount you’ll pay for MIP will vary based on how much you put down.
    • It can be cancelled once you have 20% equity in your house, if you meet all necessary criteria.
  • A certificate of completion from Fannie Mae’s homeownership education course, if:
    • You’re a first-time buyer who will occupy the house. At least one borrower will need to take the course if all the occupying borrowers are first-time homebuyers.
    • You don’t have a credit score. At least one borrower will have to take the course if all the occupying borrowers have “non-traditional credit.”

Homebuyers who meet certain exceptions can complete alternative training or home counseling to satisfy this requirement.

3. Home Possible® mortgages

Home Possible mortgages work much the same as HomeReady loans, but they’re provided through Freddie Mac. Given how similar the programs are, we recommend consulting one of our Mortgage Professionals to help determine which is best for you. To learn more about Home Possible’s income limits, you can use its Income and Property Eligibility Tool here.

4. VA loans

If you’re a qualifying service member, veteran, or surviving spouse of a veteran, you may be able to buy a home through the VA with 0% down. These loans are backed by the Department of Veterans Affairs (VA), and are often the best low down payment mortgage option for homebuyers given their range of benefits. These include low interest rates and no requirement for mortgage insurance. This is significant because mortgage insurance is usually charged when you put less than 20% down. Depending on a loan’s size, it can add thousands of dollars to a mortgage each year.

One added cost VA loans include is a VA funding fee. As of January 1, 2020, the fee is equal to 2.3% of a home loan if your down payment is less than 5%, and it’s your first time taking out a VA loan. You may be exempt, however, if you meet certain conditions, such as having a qualifying military-related injury. Sellers can also help you pay some or all of this cost if their contribution is within the VA’s guidelines.

Some things you’ll need to qualify for this loan with Mr. Cooper include:

  • A middle FICO score of at least 600.
  • A full entitlement: If you’re not familiar with entitlements, they’re a guarantee of how much the VA will pay your lender should you default on your mortgage. The amount of your guarantee can influence how much you can borrow.
  • A Certificate of Eligibility (COE): VA borrowers present this to lenders to show they’re eligible for a VA loan and have an entitlement. You can learn more about COEs and follow a link to apply for one here.

Important considerations

As you weigh these options, bear in mind that when you purchase a home with a low down payment:

  • It will take longer to pay off your home and build equity.
  • Your monthly mortgage payment will be higher than it would be with a larger down payment.
  • Each of these loans requires closing costs totaling 1-3% of a home loan.
  • Some additional restrictions may apply if you’re buying a second home, condominium, or investment property.

For more on down payment and loan options that may suit you best, check out our down payment guide or talk to one of our Mortgage Professionals at 855-375-4001. With the right solution, you may go from priced out of the market to into a new home.

Tradenames and trademarks used in this blog post are the property of their respective owners. Nationstar Mortgage LLC d/b/a Mr. Cooper is not affiliated, associated, or sponsored by any of these owners. Use of these names and trademarks is not intended to and does not imply endorsement, but is for identification purposes only. Information provided does not necessarily represent the views of Mr. Cooper. Information is subject to change without notice.