Monday, 20 May 2019

Prospective homebuyers with little or no cash may assume they need to wait years to save enough for a down payment.

While conventional mortgages often require a down payment of 20% of a home's price, numerous alternatives can make homeownership dreams a reality for those without tens of thousands of dollars — or more — in the bank.

Mortgages with low or zero down payment requirements provide a particularly appealing option. Other help is available as well.

How can I find a mortgage that allows a low down payment — or none at all? 

A variety of specialized home loans demand little or no down payment for first-time buyers and others lacking a large cash reserve. The federal government guarantees several of these mortgages and sets requirements on qualifying for them, but borrowers generally apply through banks or other lenders. 

What requirements do I need to meet to qualify for one of these mortgages? 

Depending on which type of loan you pursue, you'll need to meet certain eligibility requirements covering income (minimums or maximums may apply), credit score, assets and, in some cases, property location. Loans that allow borrowers to secure a mortgage with low or no down payment often also provide more flexible terms than conventional loans when it comes to credit scores. 

What specific types of mortgages might give me a break on the down payment? 

Here's a rundown of several loan programs that might help you make this milestone purchase.

FHA loans are mortgages that are insured by the Federal Housing Administration. The down payment required may be as low as 3.5% of the purchase price. These loans, popular with first-time home buyers, usually offer easier credit terms than other mortgages — generally a 580 minimum credit score — and lower closing costs as well. This makes them an appealing option for consumers with limited cash and less-than-stellar credit.

Median home sale prices in a buyer's geographic location help determine maximum FHA loan amounts. The federal government offers an online tool to help home buyers find the loan limit in their area. While FHA loans are available to consumers with a wide range of incomes, borrowers need to show steady employment and meet certain debt-to-income requirements.

Your lender may help with closing costs under certain conditions, and you may be able to roll some of these expenses into the loan itself. With an FHA loan, as with many mortgages, the borrower must pay monthly mortgage insurance premiums.

VA home loans are available to U.S. armed services members, veterans and surviving spouses. These mortgages are guaranteed by the U.S. Department of Veterans Affairs and usually require no down payment at all.

Your bank may help with closing costs if you buy a property in a low-to-moderate income neighborhood or meet certain income requirements. While VA loans don't require mortgage insurance, borrowers do have to pay a funding fee at closing, either in cash or by folding it into the mortgage.

BBVA offers up to $3,500 in closing-cost assistance for low and moderate-income home buyers who qualify for an FHA loan and up to $2,500 for those who qualify for a VA loan, depending on mortgage size.

USDA loans are government-guaranteed loans that are available to low and medium income rural home buyers. USDA loans require no down payment. Income limits vary by household size. USDA loans require relatively low-cost guarantee fees, to be paid both up front and annually, instead of private mortgage insurance.

BBVA's Home Ownership Made Easier (HOME) loan aims to help qualifying low and moderate income customers borrow 100% of a home's purchase price without paying any down payment. The HOME mortgage does not require you to purchase private mortgage insurance. BBVA will help with up to $3,500 in closing costs and provide home ownership education.

Borrowers may use gifts and qualified down payment assistance programs to help qualify for this loan. They do have to supply $500 of their personal funds toward the purchase. The home buyer's income can't exceed 80% of the area median, or the home must be located in a low-to-moderate income census tract.

A HomeReady® Mortgage is part of a Fannie Mae program designed for low-to-moderate income buyers and requires only a 3% down payment. It offers flexibility in funding the down payment and closing costs, allowing borrowers to use multiple cash sources, including gifts, and none of their personal funds.

While this loan requires private mortgage insurance, the borrower may be able to cancel it once they have 20% equity in the property. While they serve similar consumer populations, HomeReady® is a Fannie Mae loan available through lenders nationwide, while HOME is specifically a BBVA product. It's best to talk with a lender to help you figure out which mortgage works best with your circumstances. 

What other funding sources might help me gather enough cash for a down payment?

If you don't have enough savings to cover the minimum required down payment on a loan, you have several options. 

  • Gifts. Parents, other family members and friends may give you money to use for a down payment, but it isn't as simple as receiving a check and turning the money over to your lender. Depending on the type of loan, you may face limitations in applying gift money to your down payment. Your lender also will likely require a letter from the generous relative or friend affirming that the money is indeed a gift and not another loan, among other conditions. Before you apply for a mortgage, ask your banker about best practices for receiving and using down payment gifts. Experts suggest you'll fare better if you accept the funds at least a few months in advance. 
  • Down payment assistance programs. Your city and state governments, as well as various local and regional organizations, may provide assistance to home buyers who need down payment assistance. Programs may provide substantial grants or forgivable loans. You can search for programs online or from a housing counselor. 
  • Your IRA. Financial experts generally warn against tapping into your retirement funds early for any purpose other than retirement, and the government typically imposes a 10% penalty for taking a withdrawal from an Individual Retirement Account (IRA) before age 59 1/2. However, first-time homebuyers and those who haven't owned a home in recent years may be able to withdraw up to $10,000 from an IRA without penalty ($20,000 for a couple) to pay for a new home.

The rules may vary depending on your individual situation, so consult a tax expert if you go this route.

If you're considering homeownership, BBVA offers a variety of powerful loan options. Contact one of our bankers to explore the best path for you. 

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