Do First-Time Homebuyers Have any Low Down Payment Options?

One of the largest obstacles first-time homebuyers face is the down payment. Many people avoid buying a home because they think they can’t afford the 20% down payment requirement. The good news is that the 20% down payment requirement is an ‘old myth.’ There are several loan programs available to first-time homebuyers that require much lower and more affordable down payments.

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Keep reading to find out of you might be eligible for one of these first-time homebuyer programs.

FHA Loans for First-Time Homebuyers

FHA loans used to have the name ‘first-time homebuyer’s loan.’ While it’s a loan for anyone that qualifies today, it is a great option for those that never owned a home before. FHA loans require just a 3.5% down payment, which is 16.5% less than what you’d need on a conventional loan with no PMI.

If you bought a $250,000 home, you would need $8,750 down on the home. The good news is, though, that the FHA allows you to receive 100% of your down payment as a gift. If you have a relative that is willing to help you buy a home, you can accept gift funds (money that doesn’t require repayment) from your relative. The FHA requires that your relative write a Gift Letter stating their intentions for funds and that it is not a loan.

The FHA has flexible underwriting guidelines to go along with their low down payment requirements that make it even easier for first-time homebuyers:

  • 580 credit score
  • 31% housing ratio
  • 41% total debt ratio
  • Stable employment/income
  • Proof that you’ll live in the home as your primary residence

You can also get help from the seller or lender to cover your closing costs. With the right help, it’s entirely possible to come to an FHA closing with no money of your own. Of course, most people put in at least a little bit of their own investment; at least the possibility is there.

You should know that FHA loans do charge mortgage insurance fees. You’ll pay 1.75% of the loan amount upfront (at the closing) and then 0.85% of the loan amount each year (broken up into 12 payments). This continues for the life of the loan, no matter your LTV.

USDA Loans for Rural First-Time Homebuyers

The USDA loan is another government-backed loan that works well for first-time homebuyers. This program is a little different because it requires that homebuyers purchase a home in a ‘rural’ area. Luckily, the USDA has a flexible definition of rural. You don’t have to buy a home out in the middle of cornfields to qualify. Their map offers many opportunities to purchase homes in rural, but not far from the city homes.

The USDA loan doesn’t require a down payment. You can borrow 100% of the purchase price of the home. The USDA also has flexible guidelines, but first you must prove that you are eligible for the program. Unlike the FHA loan, not all borrowers will be eligible. The USDA only offers loans to homebuyers with low to moderate income. The USDA also includes income from anyone in your household, even if they aren’t on the loan.

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The USDA only offers loans to those households that make less than 115% of the average income for the area. You can use the USDA income qualifier tool to see if you qualify. (Note that the USDA gives allowances for certain situations, such as having children or the elderly living with you).

If you pass the USDA eligibility requirements, you can try to get approved for a USDA loan if you meet the following:

  • 640 credit score
  • 29% housing ratio
  • 41% total debt ratio
  • Stable income/employment
  • Proof that you’ll live in the home as your primary residence

USDA loans also charge mortgage insurance, but in smaller amounts than the FHA. Most borrowers pay 1.0% of their loan amount upfront and then 0.35% of the principal balance each year (paid monthly).

VA Loans for Veterans That are First-Time Homebuyers

If you are a veteran that served at least 181 days during peacetime or 90 days during wartime and you had an honorable discharge, you may be eligible for the VA loan.

The VA loan, like the USDA loan, offers 100% financing. You don’t have to worry about getting money for a down payment. The only eligibility rules are those that we discussed above. In order to qualify, you’ll need to meet the following:

  • 620 credit score (this is the average score required by lenders)
  • 43% total debt ratio
  • Enough disposable income to meet the VA’s requirements for your area and family size
  • Proof that you’ll live in the home as your primary residence
  • Stable income/employment

What’s unique about the VA loan is that you don’t have to pay mortgage insurance. Both the FHA and USDA loans require upfront and annual mortgage insurance (which you pay monthly). This can save you even more money on the VA loan if you are a veteran that is eligible.

Conventional Loans for First-Time Homebuyers

It’s important not to exclude the conventional loan as an option for first-time homebuyers as well. Conventional loans require 20% down only if you want to avoid PMI. If you don’t mind paying mortgage insurance until you owe less than 80% of the home’s value, you can get away with just a 5% down payment. The kicker is that conventional loans have tougher guidelines:

  • 680 credit score (this is the average that most lenders require)
  • 28% housing ratio
  • 36% total debt ratio
  • Stable income/employment

As you can see, first-time homebuyers have a variety of options with low down payment requirements. If you have avoided buying a home because of the lack of money you have saved, you may find that you do qualify for financing to buy a home, putting an end to your need to rent.

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