No, you do not need a 20 percent down payment for several types of mortgage loans. The fact you don’t have savings or have never owned a home shouldn’t be obstacles to buying a home. Some government-sponsored loans assist first-time home buyers, veterans and those living in rural areas to buy a home by waiving the down payment or requiring a small percentage down. Always ask mortgage lenders or your mortgage broker about the eligibility criteria of each of these loans to determine if you qualify. Never assume that you do not qualify.
A Federal Housing Administration insured loan is ideal for a first-time home buyer. The down payment on an FHA loan can be as low as 3.5 percent of the purchase price. Though financing is available for 96 percent of the purchase price, you will likely need to pay a mortgage insurance premium monthly to the lender in lieu of the down payment. Funding for FHA loans is through mortgage companies and banks. If you need assistance with a down payment for an FHA loan, the U.S. Department of Housing and Urban Development can help you find state and regional programs that offer assistance with down payment and closing costs.
Veteran Affairs backs home loans for veterans, active duty personnel, reservists/National Guard members and some surviving spouses. VA-backed loans are available through lenders including federal savings banks, national banks, farm credit system institutions, state banks, insurance companies, credit unions and private banks. According to the VA, no down payment is required unless the purchase price exceeds the reasonable value of the property, or the loan is a Graduated Payment Mortgage. If the purchase price is deemed beyond the reasonable value of the property, you may need a down payment for the difference.
U.S. Department of Agriculture Rural Development Loans
If you live in an area considered rural by the U.S. Department of Agriculture, you may qualify for the USDA home loan program. Additional eligibility requirements include a household income meeting certain guidelines, occupation in the house as the primary resident, U.S. citizenship, not currently a homeowner and the ability to repay. Rural development loans do not require down payment and are usually 30-year fixed rates from the participating lender of your choice. Check with your lender or mortgage broker about eligibility for these loans. You may be surprised at what the USDA considers rural.
Loans with PMI
If you are able to obtain a commercial mortgage without a 20 percent down payment, you will probably be subject to Private Mortgage Insurance. The lender may require a monthly PMI payment if your mortgage loan is for more than 80 percent of the home’s value. Per the Homeowner’s Protection Act of 1998, the homeowner can request cancellation of PMI once he has paid 20 percent of the loan and has consistently made the mortgage payments within two years. PMI may be required in conjunction with Fannie Mac-backed and Freddie Mac-backed mortgage loans, among other loan types.
Francine Richards is a licensed multi-state insurance agent with years of human resources and insurance industry experience. Her work has appeared on Blue Cross Blue Shield websites and newsletters, the Houston Chronicle and The Nest. Richards holds a Bachelor of Arts in communications from the University of Maryland.