Here’s the low-down on buying a house with a minimal down payment.
These are excellent loan programs. I’ve highlighted some advantages of each.
- Only 3% down payment.
- You don’t have to be a first-time home buyer.
- Can be a house or condominium.
- You get the same low interest rate as the buyers with 20% down.
- Reduced monthly mortgage insurance fee.
- There is an income limit, unless the neighborhood is an area with low home ownership (called under-served area).
- 620 credit score or higher.
- Money comes from Freddie Mac (get the loan through your mortgage broker).
This is Fannie Mae’s version of HomePossible.
- 680 credit score or higher.
FHA – Federal Housing Administration
- Down payment is 3.5%.
- 580 credit score
- Bankruptcy Chapter 7 okay after 24 months discharge.
- Can be a house, condominium, or manufactured home.
- No education class required.
- Has an upfront mortgage insurance fee of 1.75% that is rolled into the loan.
I recommend speaking with a mortgage broker who will find the best and lowest priced loan that is available for you. Only a mortgage broker is required by federal lending law to get you the lowest interest rate available. Why? Because mortgage brokers shop wholesale lenders for you. Banks, credit unions, and direct lenders use their own money, so they don’t have the wholesale options. Therefore, they are allowed to charge you whatever they like (within limits). For example, today a home buyer received a quote from a direct lender (rhymes with Build Mortgage) with an interest rate of 5.5% whereas the mortgage broker’s rate is 4.5%.
If you are in Washington or California, I am licensed in those two states and would be happy to help you! (NMLS # 1284134)
You can apply online here.
The Home Possible Advantage Loan Program has distinct advantages for home buyers. First, let’s look at what it takes to qualify, then we’ll look at the benefits.
Who Can Qualify for Home Possible Advantage
* First-time home buyer, or
* Displaced homemaker or single parent who used to have joint ownership in a marital residence, but now is buying on their own, or
* Have not owned real estate in the last three years.
* Credit score 620 or higher.
* The home must be your primary residence, not a rental or vacation home.
* Annual income cannot exceed 100% of the median income in the area, UNLESS the property is located in an area designated to increase home ownership. In that case, there is no income limit.
The Home Possible Income & Property Eligibility tool is here.
Benefits of the Home Possible Advantage Loan Program
Only 3% down payment.
Lower monthly mortgage insurance (MI) payment.
No up-charge to the interest rate for the low down payment.
Lower monthly payment.
Down payment can be from your own money, or gift money from immediate family.
How to Get the Home Possible Advantage Loan
You get this loan through your mortgage broker. Your broker can shop several wholesale lending sources for Home Possible in order to find you the best pricing you qualify for. I am licensed in California and Washington.
Remember, get pre-approved for financing first, then contact your real estate agent to find a home.
Which is better for you? The HomeAdvantage loan or the FHA loan? Here is a quick and easy comparison.
Good to know: You do not need to be a first-time home buyer to qualify for either of these programs. As long as you will occupy the house as your primary residence for at least one year, you can use either HomeAdvantage or FHA.
- Has an income limit to qualify. In WA, it is $97,000 household income. In CA, it varies by county.
- Provides the cash for you to use as a down payment. (The down payment will be either 3% or 3.5%.)
- The down payment is not a gift. It is an interest-free loan that you pay back when you pay off your mortgage — whether it’s by selling the house, refinancing, or paying it off in 30 years.
- To receive the down payment from HomeAdvantage, you must use a HomeAdvantage mortgage. This mortgage will have a higher interest rate by about .25%. So yes, you get an interest free down payment, but you pay a little more for the mortgage.
- The way to get a HomeAdvantage program is through a loan officer who has taken the training class and is authorized by the state to do the loan. (Such as myself. I am licensed in WA and CA. In CA, the program is CADAP and is similar to HomeAdvantage.)
- Attending a home buyer education seminar is required. Your loan officer will direct you to an available class. In WA, the class is free. In CA, there is a nominal fee.
FHA (Federal Housing Administraion) Loan
- No income limit.
- Down payment is 3.5%. It can come from your own funds, a gift from family, or an acceptable down payment assistance program.
- An Upfront Mortgage Insurance Premium (UPMIP) is required. It is 1.75% of the loan amount. Most people roll it into the loan, making the mortgage slightly higher. Because it is amortized over 30 years, it increases your monthly payment by only a small amount.
- You might have a smaller monthly payment with the FHA loan, depending on credit score and what you qualify for.
- No education class required.
- Because you provided the down payment, you do not have anything to pay back when you sell the house or pay off the mortgage.
HomeAdvantage (and CADAP) is a great program if you can’t save money for a down payment as fast as home prices are rising. The FHA loan is a great program if you can provide your own down payment but don’t qualify for the conventional loan.
Thank you for stopping by my blog. If you are in WA or CA, I am happy to provide you with a free analysis and cost estimate worksheet for the best loan you qualify for. That might not be either HomeAdvantage or FHA. As a full-service mortgage loan officer, I have an entire “smorgasbord” of loan programs to choose from.
Extended families or friends who live together and all contribute to the household income have had a challenge when trying to buy a home. One person might not have a credit score (or a too-low score). Or, they might not be able to document the down payment money.
For these good folks, the new HomeReady loan program comes to the rescue!
The HomeReady loan allows a non-borrowing person’s income to be considered. As long as this person lives in the home, his or her additional income allows the borrower to be approved with a higher debt-to-income ratio. (Up to 50% DTI) The non-borrower does not have a credit check at all.
This is not subprime lending. This is Fannie Mae recognizing that multi-generational families are stable and historically make their payments on time. HomeReady honors family tradition by making home ownership more attainable.
Facts About the HomeReady Loan Program
- Down payment required is 3% of the purchase price. The down payment can be a gift, grant, come from a down payment assistance program, or be your own funds.
- You get a lower monthly mortgage insurance fee than with the FHA or traditional conventional loan.
- Income restrictions apply. Depending on the neighborhood of the property, your income can be 80% to 100% of the area’s median income. (Your loan officer can provide figures for your area.)
- The non-borrowing person does not have to be a blood relative. He or she can be a friend who will be living in the home for at least 12 months after purchase.
- The non-borrower’s income must be at least a 30% contribution. This is to ensure that his or her income is sufficient to help out in case of financial hardship or emergency. More than one non-borrower can be used to meet that 30%. For example, you can use both grandma’s and a brother’s incomes to add up to the 30%.
- You can be a first-time home buyer or a repeat home buyer.
- You cannot own rental properties. This is not a program for investors to amass a portfolio of properties.
- You can buy a condo or a house with 3% down. Manufactured home with 5% down.
- Minimum credit score is 620 (middle of three credit scores).
- At least one borrower must take an online class about responsible home ownership. Fannie Mae’s fee for the class is $75.
Please help get the word out by sharing on Facebook and Twitter, because home ownership is a wonderful thing.
Need more information?
For other rules and guidelines, see your loan officer. If you are in Washington or California, I would love to help you. I am state licensed, NMLS 1284134. I work for Envoy Mortgage, a full service mortgage lender.
Heads up! May 24 is the deadline for applying the cheapest FHA loan. An FHA loan is commonly called a First-Time Home Buyer’s loan, because the down payment requirement is only 3.5% of the purchase price. You do not have to be a first time home buyer to qualify for the loan, but you do need to live in the house as your primary residence for at least one year. This is not a loan for investors. The loan is backed by the Federal Housing Administration, and you may obtain the loan through any bank or mortgage lender that is licensed with the FHA. (Most lenders are.)
The reason I am calling May 24 the deadline for applying is because the private mortgage insurance fee increases on June 3rd. In order to make the June 3rd deadline, your loan file must have an FHA case number by that date. Because it can take a few days to get the case number, your loan officer needs to receive your application, along with all required financial documents by about May 24.
What is the FHA Price Increase?
FHA 30-year fixed rate loans with a down payment of less than 10% down will have the monthly mortgage insurance fee for the life of the loan–regardless of equity.
Loans with 10% or more down will have the fee for 11 years.
Previously, the MI fee could be cancelled after 5 years if you had at least 22% equity.
The mortgage insurance fee protects the lender in case you default on the loan. The insurance is for the lender, but the borrower pays for it. FHA is increasing the time the fee must be paid in order to protect their investment reserves. Currently, FHA has about $4 billion in reserves.
The only way to get out of the monthly MI fee early would be to pay off the loan by refinancing into a conventional loan.
If you can get your purchase contract signed this week, it would be in your best financial interest. I suggest that you speak with your real estate agent and loan officer about this looming deadline.