By Peter Norden
If you can’t afford a down payment equal to 20 percent—or even 10 percent—of your home’s purchase price, you’re not alone. Lots of prospective homebuyers, especially first-timers with credit issues and limited resources, are in the same boat.
Fortunately, a variety of loan options exist for borrowers who worry about their ability to afford homes of their own anytime soon. These five mortgage products all fit the bill. Some are available only for certain classes of people or residents of specific geographic areas, while others apply only to specific housing types. But all work toward a common end: making homeownership more affordable for deserving buyers.
FHA loans are issued by private lenders and guaranteed by the Federal Housing Administration, which has backed tens of millions of such loans since the mid-20th century.
FHA loans are designed for borrowers with limited resources and challenged credit histories, though they’re also available to prime borrowers who’d likely qualify for conventional loans as well. They require buyers to put down as little as 3.5 percent of the purchase price; however, they also require upfront and ongoing mortgage insurance premiums that can significantly add to their total cost.
Conventional 97 Loans
The Conventional 97 loan is a relatively new product that allows cash-poor buyers to put as little as 3 percent down. Unlike FHA loans, the mortgage insurance premium is cancelled at 78 percent LTV (loan-to-value, or the ratio of the loan amount to the appraised value of the house), and the borrower can request cancellation at 80 percent LTV. Like “regular” conventional loans, Conventional 97 loans also don’t require upfront mortgage insurance premium payments. That’s a big financial advantage over FHA loans.
Conventional 97 loans generally require better borrower credit, so they’re not an ideal FHA replacement for subprime borrowers. Some other restrictions apply as well, including a mandate that at least one borrower be a new homeowner (defined as not owning within the past three years) and a prohibition on adjustable-rate structures. Conventional 97 loans are therefore ideal for first-time homebuyers with good credit and limited financial resources.
The VA loan caters specifically to servicemembers, veterans and their families.
According to the U.S. Department of Veterans Affairs, VA loans can be used to purchase a move-in ready, single-family home; purchase and renovate a single-family home; purchase a condominium in a VA-approved project; purchase a manufactured home or lot for a manufactured home; and make certain energy-efficient upgrades to an existing or purchased home. As long as the assessed value of the home doesn’t exceed the purchase price, there’s no down payment requirement. There’s also no private mortgage insurance requirement.
VA loans are generally issued by private lenders, not the VA itself; however, they’re guaranteed by the U.S. government—an important consideration for lenders.
Before shopping for VA loans, you need to obtain a certificate of eligibility, or CoE. Requirements vary by branch and date of service, but borrowers generally need to demonstrate several months of continuous active-duty service in one of the major branches of the military or several years of occasional service as member of the Reserve or the National Guard. You’ll need to pass credit and income requirements too.
The USDA loan is designed for prospective homeowners in rural areas—in most cases, counties or municipalities not included in census-defined metropolitan statistical areas (MSAs). (Use the USDA’s property eligibility finder to determine if you’re buying in a covered area.)
USDA loans are designed for low- to moderate-income buyers. Income requirements may vary somewhat by region, so it’s important to check the specific thresholds in your area. The Department of Agriculture issues some direct loans to very low-income borrowers, but most are private loans guaranteed by the department. All USDA loans are subject to standard underwriting requirements.
Condominium loans are specifically designed to facilitate the purchase of condominium units. Condo loans are different than conventional loans for single-family homes in some key respects. Most important, during the underwriting process, lenders must evaluate the financial stability of the condominium association or development—not just that of the borrower, as is the case with conventional loans for detached homes.
It’s important to note that condo loans aren’t necessarily designed for credit-challenged borrowers. Unlike the other loan types on this list, condo loans cater to mainline buyers seeking a specific, less common type of housing—in this case, condo units in multi-family developments. However, since modestly sized condos can be quite affordable relative to single-family homes in many markets, condo loans are absolutely on the table for buyers without ample savings and incomes.
Bio: Peter Norden is CEO of New Jersey-based residential mortgage lender HomeBridge Financial Services, Inc.