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Low down payment mortgage options are still available if you know where to look. Despite trouble in the housing market, it is still possible for qualifying buyers to purchase the property of their dreams with little money down. The following are the most viable options on the market today:
The Federal Housing Administration (FHA) continues to offer mortgages with low down payments to qualified applicants. The best reasons to seek an FHA loan include having to pay very little out of pocket if qualified, as well as historically low interest rates on 30-year fixed rate loans. The average rate currently stands at less than 5%.
The VA (or Veterans and Active Military) Loan is an even more attractive loan to those who qualify because it requires no down payment. The lending standards for a VA loan are also generally more lax. For example, retired or active duty servicemen and women may qualify for VA loans with credit scores as low as 580.
Another popular alternative is to pay private mortgage insurance (PMI) in order to earn a lower down payment. Private mortgage insurance is essentially an insurance payment made to the lender as a means to set off any losses they may incur in the event that the monthly mortgage payments are not able to be satisfied. Many lenders will allow a down payment of as little as 5% if PMI is paid.
This is an option that requires you to take out a second loan at the same time as your mortgage, known as the "piggyback" loan. This is done so that the money from the second loan can be used to help you satisfy the necessary 20% down payment for a typical mortgage. The numbers "80", "10" and "10" come from the following breakdown: 80% is your mortgage, 10% is the second loan, and the second 10% is your down payment before it is combined with the money from the second loan.
As you are taking out a second loan, you will have to pay two loans each month if approved. The main benefit is that you will be able to buy your home by funding only half of the down payment out of pocket and avoid PMI, which can be expensive.
Paying More Interest
Some lenders will also allow you to make a smaller down payment on the mortgage if you agree to a higher interest rate. This means you will pay more over the life of the mortgage, but it may mean the difference between buying the home of your dreams and having to wait because you cannot satisfy the down payment obligation at the necessary time. These loans are structured so that the rate protects the lender from additional risk.
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