Down Payment Options For First-Time Homebuyers

In this article, we will cover and discuss the down payment options for first-time home buyers. Most homebuyers can easily afford the monthly payment on a home purchase. However, most potential homebuyers have a hard time coming up with the down payment and/or closing costs.

For first-time homebuyers, there are several down payment options available that can make the path to homeownership more accessible. The down payment can be gifted by family members.

Closing costs can be covered with a seller concession and/or lender credit. In this article, we will discuss and cover the down payment options for first-time homebuyers. We will cover the various mortgage loan programs for first-time homebuyers  with low down  payment options. In the following paragraphs, we will cover the down payment options for first-time homebuyers. In this guide, we will take a look at some of the most common options.

Types of Down Payment Options For First-Time Homebuyers

Government and conventional loan programs for first-time homebuyers provide little down payment options for first-time homebuyers. First-time homebuyer conventional loan programs offer down payments as low as 3%. Fannie Mae or Freddie Mac typically backs these and may require private mortgage insurance (PMI) if the down payment is less than 20%.

Backed by the Federal Housing Administration, FHA loans are popular among first-time buyers because they allow down payments as low as 3.5% and are more forgiving of lower credit scores.

VA loans offer a zero-down payment option for veterans, active-duty service members, and certain National Guard and Reserve members. Theyoans do not require PMI but usually include a funding fee that can be rolled into the loan amount. Aimed at buyers in rural and some suburban areas, the U.S. Department of Agriculture offers loans with no down payment requirement. Eligibility is based on the property location and the borrower’s income level. Speak With Our Expert for down payment options for First-Time Gomebuyers

Down Payment Assistance Programs (DPA)

Many states, counties, and local governments offer programs that assist first-time homebuyers with their down payments and closing costs. These programs often take the form of grants or second mortgages with deferred payments.

1. Gift Funds: Many loan programs allow down payments to come entirely or partly from gifts provided by family members or others. Lenders generally require a gift letter to confirm that the money is a gift, not a loan.
2. First-Time Homebuyer Programs: Specific programs aimed at first-time homebuyers might offer more favorable down payment terms, interest rates, or both. These programs often include education courses about homeownership.

Each option has specific requirements and qualifications, which may vary by lender and the borrower’s circumstances. First-time buyers must research and consider all potential avenues for down payment assistance and choose the one that best fits their financial situation. Consulting with a mortgage broker or lender can provide personalized information and help navigate various choices.

Down Payment Requirements For Homebuyers

Do you have good credit and good income but not enough money in the bank for a down payment on a new home purchase? Well, you are not alone. There are some obvious, semi-obvious, and not-so-obvious solutions to this problem. Not all lenders have the same credit score requirements on FHA loans. It is not illegal for a lender to take a pass on a borrower because they have higher lending standards than the minimum HUD Agency Guidelines. Most lenders do have lender overlays. Lenders can have lender overlays on just about anything and everything. This is the exact reason why not all lenders have the same lending requirements on government and/or conventional loans.

How Credit Score Can Affect Down Payment Options on FHA Loans

Debt to income ratio and down payment options can be affected by borrowers’ credit scores.  HUD, the parent of FHA, requires a 3.5% down payment for homebuyers with at least a 580 credit score. For homebuyers with a credit score under 580 FICO, a 10% down payment is required. HUD, the parent of FHA,  allows borrowers with credit scores down to 500 FICO to be eligible for FHA loans.

Homebuyers can qualify for FHA loans with credit scores down to 500 FICO. For credit scores of 500-579 may not exceed 31% front-end and 43% back-end debt-to-income ratio.

The front-end debt-to-income ratio is your housing payment which may not be higher than 31% of your gross monthly income. This includes taxes, insurances, and any homeowner’s association dues) and the back-end cannot exceed 43% which is your PITI and all other minimum monthly payments. Your total monthly debts must be below 43% of your gross monthly income. A large percentage of our borrowers are manual underwriting files. We are experts in manual underwriting.

Calculate Your Front-End and Back-End DTI Using the FHA DTI Calculator Powered by Gustan Cho Associates

What Type of Mortgage Has The Lowest Down Payment?

A frequently asked question from first-time home buyers is what type of mortgage has the lowest down payment? The best down payment options are government and conventional loans. The best down payment options with 100% financing are VA loans and USDA loans.

To become eligible for VA loans, you need to be an active duty or retired member of the U.S. military with a certificate of eligibility to qualify for a VA loans.

USDA loans are only limited in rural areas designated rural by the U.S. Department of Agriculture Rural Development. FHA loans, VA loans, USDA loans, and conventional loans all have low down payment options for first-time home buyers.  FHA loans require a 3.5% down payment requirements for borrowers with at least a 580 credit score. VA loans and USDA loans do not require a down payment.

Zero Down Payment Options on VA and USDA Loans

The best down payment options with zero money down are VA and USDA loans. Homebuyers can get 100% financing on VA and USDA loans with no down payment requirements. However, you need to be an eligible active duty and/or retired veteran to qualify for VA loans. USDA loans do not require a down payment.

Homebuyers can qualify for 100% financing on USDA loans but can only purchase a home in a rural area designated by USDA Rural Development.

There are maximum income caps on USDA loans. Debt-to-income ratio is capped at 29% front-end and 41% back-end on USDA loans. Fannie Mae and Freddie Mac allow a 3% down payment for first-time homebuyers. A first-time homebuyer is defined as a home buyer who has not owned a home in the past three years.

Agency Guidelines vs Lender Overlays

There are no overlays mortgage lenders such as the team at Gustan Cho Associates. Gustan Cho Associates are mortgage brokers licensed in 48 states. We have over 170 wholesale mortgage lenders. Most of our wholesale mortgage lenders specializing in government and conventional loans have no lender overlays.

FHA loans have the easiest and most lenient agency guidelines for borrowers with low credit scores. FHA loans are the best mortgage program for credit scores down to 500 FICO.

As long as the borrower meets the minimum agency HUD guidelines, we will honor the guidelines and qualify and approve the borrower.Until recently, the housing market has been booming. It was a sellers market where there are substantially more buyers than the inventory of homes. However, with soaring inflation, high mortgage rates, and accumulating housing inventory, home prices have been steadly been droppng with more homes than buyers. Renters are getting qualified for a mortgage so they can shop for a home before interest rates increase further. In this article, we will discuss and cover down payment options for first-time homebuyers.

HUD Down Payment Guidelines For Under 580 FICO Scores

As mentioned, borrowers qualifying for FHA loans with 500 FICO credit scores need a 10% down payment. To qualify for FHA loans with 500 FICO, you must either get an approve/eligible or meet minimum HUD guidelines. If the borrower does not have the 10% down payment, the team at Gustan Cho Associates can help the borrower boost their credit scores within a short period of time. Homebuyers with lower than 580 credit scores (borrowers with credit scores between 500 and 579) are eligible for an FHA loan but HUD guidelines require a 10% down payment versus a 3.5% down payment on a home purchase. Click here to apply for loan with low credit scores

Can Lenders Have Different Requirements for The Same Mortgage Program

The reason why most mortgage companies will only qualify borrowers with a higher credit score (higher than 580 FICO) is because of overlays by the lender. Mortgage companies can have overlays on government and conforming mortgages. Overlays are lending requirements that are above the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mac. In the next paragraph, we will discuss overlays by mortgage lenders on FHA loans.

How To Apply For a Low Down Payment Home Loan

Once your lender has gone over your situation in detail and started the qualifying process with you. They should be able to tell you what your “bottom line” or “drive out” amount will be. Hopefully, they have gone over your ability to qualify for traditionally less money down loan options like VA, USDA, FHA, and Conventional 3% down payment options. There are lots of nuances with each of those loan types so make sure you are working with a person and company that offers each. But if any careful analysis you are still short of funds we suggest these possible options.

How Can I Get Money For a Down Payment on a Home Purchase?

Many homebuyers can afford a home payment but they cannot afford the down payment. A frequently asked question is how can I get money for a downpayment? There are various strategies in down payment options for first-time home buyers. Save money for the down payment, yes, this is the obvious answer. This, of course, takes more time but heck even a few hundred dollars a month can add up. One of the easiest and fastest way to come up with the down payment on a home purchase is to borrower against your 401k. In the next section, we will cover and discuss borrowing money from your 401k for the down payment on your home purchase.

Down Payment Options Borrowing Money From Your 401k

Borrow it from 401k. Most plans allow you to borrow against up to at least half of the value of your 401k. You pay yourself back via your company payroll and there are no tax early withdrawal penalties for doing this. Depending on the lender and program the repayment of the 401k loan may not be used in debt to income calculations. Put your hat in your hand and ask your parents and/or siblings for a gift. But you might be surprised how getting a gift from parents to help you move into your own home might be easier to receive than borrowing their car on that first date years ago. Yes, you may need to name your firstborn for the giver but this is an often-overlooked option. Funds do need to be tracked from giver to receiver and a Gift Letter will be required.

Down Payment Options To Buy a House With Little Down Payment and No Closing Costs

Ask the seller to cover your costs and or prepaid insurance, interest, and tax amounts. Again, depending on the loan and down payment amount the seller can cover up to all of your closing costs and prepaid. They cannot contribute to your down payment but this is a very common option for FHA and VA loans. Of course, you will need to ask for this seller concession when you make your initial offer for the home but often a slightly higher offer price with seller concessions towards closing costs will be more attractive than a lower price offer without one. These are often written into contracts as “Seller to pay up to X% of the purchase price towards buyers closing costs and points”.

How Can Lender Credit and Seller Concession Pay Closing Costs?

Ask the lender to cover some of the costs. Lenders are paid based on the interest rate on the loan. The higher the rate the borrower receives the more $ the lender makes. Most lenders have set percentages they want to make on each loan size and type. If the current rate is 5% and you accept a rate of 5.5% the lender then has some $ available to credit back to you at closing. Not a lot of $ available but a half % in rate can get you about 1% of the loan amount in most cases. Connect with our loan officer for qualify for mortgage process

How Can Realtors Help With Closing Costs and Down Payment Options

Ask the Realtor(s) to cover some of the costs. Not always an option if they have taken a smaller cut, to begin with, or if they spent the last 50 weekends driving you around to every house for sale in the county (which is not a good thing to do to a Realtor). Like the lender, they aren’t going to cover it all but sometimes there is an option for a little help.

Selling Asset For The Down Payment on Home Purchase

Got an old baseball card collection?  Barbie Doll Collection?  Antique furniture in the attic?  An old car you plan on refurbishing when you retire?  Sell it! keep track of the transaction and show proof you own it free and clear, to begin with (even photos can work). As always, please feel free to contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response if we can help you with your mortgage needs. Or email us at gcho@gustancho.com. We are licensed in most states and are available 7 days a week.

Best Mortgage Lenders For Low Down Payment Options With No Closing Costs

Over 80% of our borrowers are folks who either got denied by other lenders or are going through stress with their mortgage process. Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on government and conforming loans. We are also experts on alternative financing such as non-QM loans and bank statement mortgages for self-employed borrowers. Our team of professionals has been in the banking industry for almost three decades. Unlike FDIC Banks, Gustan Cho Associates has zero lender overlays. We do loans banks cannot do.

FAQs: Down Payment Options For First-Time Homebuyers

• What are the main down payment options for first-time homebuyers? First-time buyers can choose from various down payment options, such as government-backed loans like FHA, VA, or USDA, conventional loans, Down Payment Assistance Programs (DPA), and gift funds from family or other sources.
• What are the down payment requirements for conventional loans? Typically, conventional loans offer a down payment as low as 3%. They are commonly supported by Fannie Mae or Freddie Mac. If the down payment is below 20%, they may necessitate private mortgage insurance (PMI).
• What are the benefits of FHA loans for first-time homebuyers? FHA loans, backed by the Federal Housing Administration, allow down payments as low as 3.5% and have flexible requirements for lower credit scores. They are a popular choice for individuals buying a home for the first time.
• Can I get a loan with no down payment? Certain loans, such as VA loans (for veterans and active-duty service members) and USDA loans (for eligible rural and suburban areas), offer zero down payment options.
• What is PMI, and when is it required? Mortgages that are not supported by the government and have down payments lower than 20% will necessitate Private Mortgage Insurance (PMI) to safeguard the lender in the event of borrower default.
• What are Down Payment Assistance Programs (DPA)? DPA programs provide financial assistance for down payments and closing costs, often through grants or second mortgages with deferred payments. These programs are offered by many states, counties, and local governments.
• Can down payments come from gifts? Many loan programs allow down payments from gifts provided by family members or others. A gift letter is generally required to confirm that the money is a gift and not a loan.
• How can credit scores affect down payment options for FHA loans? For credit scores of 580 or higher, a 3.5% down payment is required. If the credit score is between 500-579, a 10% down payment is needed. Generally, credit scores below 500 are not eligible for FHA loans.
• What is the front-end and back-end debt-to-income (DTI) ratio? Front-end DTI refers to the portion of your gross monthly income dedicated to housing expenses, with a maximum of 31% for FHA loans. Back-end DTI encompasses the percentage of your gross monthly income allocated to all monthly debt payments, including housing, capped at 43% for FHA loans.
• How can I calculate my DTI ratio? An FHA DTI calculator can determine your front-end and back-end DTI ratios.
• What is the best way to save for a down payment? Regularly set aside a part of your earnings, think about taking a loan from your 401(k), ask for financial gifts from family members, and think about selling off assets or collectibles.
• Can closing costs be covered by the seller or lender? Closing costs can often be covered through seller concessions, agreed upon during the home purchase offer, or through lender credits, which are offered in exchange for a slightly higher interest rate.
• Are there any programs specifically for first-time homebuyers? Specific first-time homebuyer programs may offer more favorable down payment terms, interest rates, or both. These programs often include homeownership education courses.
• How can I apply for a low-down payment home loan? Consult a mortgage broker or lender to understand your options and begin the qualification process. They will help you navigate the various loan types and identify the best fit for your financial situation.
• What are the benefits of working with Gustan Cho Associates? Gustan Cho Associates provides various services, including no lender overlays on government or conventional loans. They specialize in alternative financing options, such as non-QM loans and bank statement mortgages, and boast a team of professionals with extensive experience in the mortgage industry. Moreover, they are licensed in multiple states and offer services seven days a week.