Government Loans | Down Payment Assistance
Is a large down payment the only thing standing between you and your dream of owning a home? Then you should know it is possible to buy a house with a small down payment, or no down payment, low to moderate income and less than stellar credit.
FHA loans, HomeReady® mortgages offered by Fannie Mae and Home Possible® mortgages through Freddie Mac are designed to help borrowers without large down payments qualify for a home loan.
FHA Loans
A FHA insured loan is a US Federal Housing Administration mortgage insurance backed mortgage loan which is provided by an FHA-approved lender, like Arcstone Financial.
Borrowers with a credit score of 580 or higher can get an FHA loan with a down payment as low as 3.5%. For those with credit scores between 500 and 579, the minimum down payment is 10%.
All FHA loans require borrowers to pay both upfront and annual mortgage insurance. The upfront mortgage insurance premium is 1.75% of the base loan amount. The annual mortgage insurance premium depends on the loan amount, term and loan-to-value ratio (LTV).
For example, a 30-year mortgage with a base loan amount of less than $625,500 would have an annual mortgage insurance premium of 0.85% of the base loan amount, while a loan of the same amount but an LTV greater than 90% and less than or equal to 95% would have an annual insurance premium of 0.80%.
FHA loans are not limited to low-income borrowers — anyone can take advantage of the program. There are, however, limits to the amount the FHA will insure, which vary depending on location. For 2019, the maximum for Los Angeles County -Long Beach and Anaheim - on a single family residence is $726,525, $930,300 for a duplex, $1,124,475 for a Tri-plex and $1,387,400 for a four-plex.
HomeReady® Mortgage from Fannie Mae
HomeReady® loans from Fannie Mae are geared toward borrowers who:
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Have low to moderate income
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Have limited cash for a down payment
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Have a credit score of 620 or higher
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Have supplemental boarder income or rental income
HomeReady® mortgages are available with down payments as low as 3.0%, but any borrower putting down less than 20% is required to pay mortgage insurance. The mortgage insurance premium depends on the borrower’s credit score and LTV. With a 3% down payment and a credit score of over 740, the premium would be 1.000% of the loan amount. However, unlike FHA loans, HomeReady® borrowers can have their mortgage insurance canceled once their home equity reaches 20%.
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However, HomeReady® mortgages are limited to borrowers who meet certain income limits. In some areas, that limit is 100% of the area median income (AMI). In low-income neighborhoods, there are no income limits. You can check the income limit for your area here.
Buyers who might have trouble qualifying on their income alone may benefit from the flexibility HomeReady® mortgages offer. Borrowers may be able to add rental income from an accessory unit or a tenant to their qualifying income on a loan application.
Eligible HomeReady borrowers also have a few options when it comes to funding their down payment and closing costs. On single-unit properties, there is no requirement that the borrower contributes a certain percentage of their own funds. So the borrower can use gifts, grants or Community Seconds loans to cover their down payment and closing costs.
Fannie Mae also requires the borrower to complete its Framework online education program. The program is designed to educate borrowers on navigating the loan process and successfully managing their mortgage. The fee for the course is $75.
Freddie Mac Home Possible® and Home Possible Advantage® loans
Freddie Mac’s Home Possible® and Home Possible Advantage® loans — collectively referred to as Home Possible mortgages — are geared toward borrowers who:
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Have low to moderate income
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Have limited cash for a down payment
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Have a credit score of 660 or higher
However, Home Possible® loans are also a good option for borrowers who don’t have a credit score because they have no credit history. In that case, Arcstone Financial will look for “Noncredit Payment References” such as 12 months of rental payments or other monthly payments that don’t appear on the borrower’s credit report.
Home Possible® mortgages are available with down payments as low as 3.0%, but borrowers with less than 20% down are required to pay mortgage insurance. Home Possible® mortgage insurance premiums are risk-based, so the higher a borrower’s credit score, the lower their mortgage insurance premium. With a 3% down payment and a credit score of over 740, the annual premium would be 1% of the loan amount. Borrowers can also have their mortgage insurance canceled once the loan balance drops to at least 80% of the home’s value.
Like the HomeReady® program, Home Possible® mortgages come with income limitations. The borrower’s annual income must be less than or equal to the AMI for their census location unless the area is designated as an “Underserved Area” or “High Cost” area. In an Underserved Area, AMI requirements do not apply.
In a high-cost area, the borrower’s income can exceed the AMI by a certain percentage. You can check the income limits for your area here.
Home Possible® mortgages require that the borrower make a minimum 3% contribution toward their down payment and closing costs, but that 3% can come from their own funds, a gift, a grant or the Affordable Second® program. That 3% cannot come from the seller or any person or company affiliated with the seller.
Buyers are required to complete a borrower education course if all borrowers on the loan are first-time buyers, or if the lender had to rely on Noncredit Payment References because the borrowers don’t have a credit score. They can meet the education requirement by taking a course from a HUD-approved credit counseling agency, housing finance agency (HFA), community development financial institution or the free course offered by Freddie Mac: CreditSmart – Steps to Homeownership.
VA Loan
The VA loan is a $0 down mortgage option available to Veterans, Service Members and select military spouses. VA loans are issued by private lenders, such as a mortgage company or bank, and guaranteed by the U.S. Department of Veterans Affairs (VA).
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No down payment requirements, making the VA a truly no-money-down opportunity.
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No mortgage insurance requirements and low closing costs, saving you money upfront and over time.
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More credit and income flexibility, making it easier for eligible borrowers to qualify.