Down Payment Assistance Programs

Down Payment Requirements for Conventional, FHA, VA, and USDA Loans

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If there’s one thing that holds many potential homebuyers back from buying a home, it’s the down payment or lack thereof. It’s hard to save money while paying rent and dealing with the standard cost of living. Many people avoid buying a house because they don’t have the standard 20% down payment that they assume that they need.

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In reality, this isn’t the case. Even conventional loans don’t require a 20% down payment. Keep reading to learn the minimum down payment for each program to see which one you may qualify for after all.

Conventional Loan Down Payment Requirements

Conventional loans carry the myth that you need to put 20% down on them, but you don’t. You can get away with a down payment as low as 5%. Let’s look at how different that looks.

Let’s say you want to buy a home for $200,000. If you abided by the 20% rule, you would need $40,000 for the down payment. If you put down the minimum down payment, though, you’d only need a down payment of $10,000. That’s a difference of $30,000 and probably many years of saving for a down payment.

Conventional loans do require you to pay Private Mortgage Insurance if you do put less than 20% down on the home, though. This shouldn’t be a deal breaker though. PMI is insurance that protects the lender as long as you owe more than 80% of the home’s value. Once you owe less than 80% of the home’s value, though, you can have the lender eliminate the PMI from your loan without requiring you to refinance the loan.

Conventional loans do have stricter guidelines than other loan programs. You will need:

  • 680 credit score or higher
  • 28% housing ratio (your mortgage payment can’t exceed 28% of your gross monthly income)
  • 36% total debt ratio (your total mortgage payment can’t exceed 36% of your gross monthly income)
  • Stable employment and income
  • FHA Loan Down Payment Requirements

FHA loans require an even lower down payment. You can put down as little as 3.5% of the home’s purchase price and get an FHA loan. This could save you 1.5% compared to the conventional loan. FHA loans do charge mortgage insurance on your loan as well. The difference with FHA loans, though, is that they charge you mortgage insurance no matter how big or small your down payment is on the home.

FHA mortgage insurance also lasts for the life of the loan. Unlike conventional loans, you can’t get it eliminated. As long as you have the FHA loan, you pay the mortgage insurance. The only way to eliminate it is to refinance the loan into a conventional loan once you owe less than 80% of the home’s value.

The FHA loan has more flexible guidelines than the conventional loan:

  • 580 credit score
  • 31% housing ratio
  • 41% total debt ratio
  • Stable income and employment
  • Proof that you’ll live in the home as your primary residence
  • No defaulted federal debt

The FHA also has one exception to the credit score rule. You may be able to get away with a credit score as low as 500 (if you can find a willing lender). The difference is that you will have to make a minimum down payment of at least 10% if you have a credit score lower than 580.

VA Loan Down Payment Requirements

If you are a veteran of the military, you have the good fortune of securing the VA loan. You need to prove that you are entitled to this benefit by providing your Certificate of Entitlement. You can obtain this if you have served at least 90 days during wartime or 181 days during non-wartime. If you served in the National Guard or Reserves, you must serve at least 6 years. No matter your branch of the military, you must also have an honorable discharge.

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If you are eligible for the VA loan, you don’t need a down payment. You can get a 100% loan. This makes it much easier for veterans to become homeowners. The VA is able to offer this option because they guaranty the loans. In other words, they back the lenders up if you default. The VA will pay the lender back 25% of the amount that they lost.

VA loans don’t require mortgage insurance. You do pay an upfront funding fee equal to 2.15% of your loan amount for regular military members and 2.4% for members of the National Guard or Reserves.

VA loans also have flexible guidelines:

  • Minimum 620 credit score
  • Maximum 43% total debt ratio
  • Enough disposable income to meet the requirements for your area and family size
  • Proof that you will live in the home as your primary residence
  • No defaulted federal loans

USDA Loan Down Payment Requirements

USDA loans are another 0% down payment option. In order to be eligible for the program, you must purchase property in a rural area according to the USDA standards. You must also have a total household income that is equal to or less than 115% of the average for the area.

If you are eligible, you won’t need a down payment for the USDA loan. You can borrow 100% of the home’s purchase price as long as it’s a modest home for the area. The USDA does charge both upfront and annual mortgage insurance. You pay the annual mortgage insurance for the life of the loan, as you do for the FHA loan. The only way to cancel it is to refinance the loan into a conventional loan.

In order to qualify for a USDA loan, you must:

  • Have a 640 credit score or higher
  • Have a maximum 29% housing ratio
  • Have a maximum 41% total debt ratio
  • Prove that you will live in the home as your primary residence
  • No defaulted federal loans

As you can see, you have many options for loans even when you don’t have a 20% down payment. Explore your options and see which loan will work the best for you to become a homeowner.

Meta Description: You don’t need a 20% down payment for most loan programs today. Learn the lowest amount you can put down for each of the loan programs today.

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Buying a Condo with FHA Financing

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FHA loans and condos are often the two things first-time homebuyers want. But do they go hand-in-hand? Even if you aren’t a first-time homebuyer, can you buy a condo with FHA financing?

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The short answer is ‘yes,’ you can buy a condo with FHA financing. The longer answer is that you can buy a condo with an FHA loan, but you have to follow the strict requirements set by the FHA. Any loan program has stricter requirements when it comes to condos because they are ‘riskier’ than a single-family home.

Keep reading to learn what you need to secure FHA financing on a condo.

The Condo Must Have FHA Approval

Perhaps the largest hurdle to jump when buying a condo is getting FHA approval. This goes beyond what the lender will allow. The FHA must say that it’s okay for FHA borrowers to use FHA financing to buy a condo in that development.

Here’s what it takes for the FHA to approve a condo development:

  • No more than 25% of the units in the development may be for commercial purposes
  • One person (investor) cannot own more than 10% of the units
  • A majority (85%) of homeowners in the development must be on time with their HOA dues
  • At least half of the units must be primary residences
  • The FHA must approve the association’s budget and financial status
  • The association must not be involved in any litigation or have any pending litigation against them
  • The development must have adequate property insurance

These are the FHA requirements in a nutshell. They look at each development on a case-by-case basis. Because when you buy a condo you buy more than your own unit, you buy into shared property with the other owners, the FHA needs to make sure the association has things under control. They need to know that one person doesn’t own a majority of the units or that the units aren’t mostly rented out or used as condotels.

The Easiest Way to Buy a Condo With FHA Financing

Do you want the easiest way to purchase a condo if you are an FHA borrower? Find a development that the FHA already approved. There are plenty of them throughout the United States. This way you cut down on the red tape and the time it takes to get to the closing.

HUD offers a list of FHA-approved condos on their website. You can make your search as narrow or as broad as you like. For example, you can search by ‘all states,’ but you can probably narrow your search down to at least the state you want to live, or even as narrow as a specific county. If you found a particular development you are interested in already, you can also search by condo name.

Your real estate agent can also be a valuable resource when helping you find an FHA-approved condo. Use a realtor that is familiar with using FHA financing on a condo for the best results. Real estate agents have early access to MLS listings, which the realtor can tell if the development has FHA approval or not.

Buying an Unapproved Condo

If you happen to fall in love with a condo that doesn’t have FHA approval yet, you are in for a longer ride. The development must get FHA approval in order for you to move forward with your financing. Keep in mind that the association isn’t obligated to request FHA approval – it’s up to the directors if they want to go through the approval process or not.

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The condo development’s status will determine how long the process will take. If you happen to find a development that was once FHA approved, but has since let the approval expire (they have to keep renewing their approval), you may get by with a streamlined approval process if the approval expired within the last six months.

If the development’s approval expired more than six months ago or they never had approval, they must go through the process from scratch. This means proving all of the factors we stated above plus resolving any other issues that come up during the approval process. It can take as long as 4 – 6 weeks to get FHA approval.

Securing FHA Financing for Your Condo

The good news is, though, that the qualifications to get FHA financing for a condo are the same as if you were buying a single-family property. You need a 580 credit score, 31% maximum housing ratio, 41% maximum total debt ratio, and a 3.5% down payment.

Some lenders may require a few compensating factors to make up for the risk of default that a condo poses, but that’s not always the case. Lenders have to follow the FHA rules and then can add their own requirements on top of that – they call it a lender overlay. If you come across a lender that is especially tough on borrowers buying a condo, keep shopping around with other FHA lenders to find one that doesn’t have the overlays.

Buying a condo with FHA financing is not impossible, but it definitely requires a little more work. Finding a condo development that the FHA already approved is certainly the easiest way to go about it, but you can always request approval to see how the process goes for you.

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How to Buy a Home without a 20% Down Payment

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Did you know that you don’t need 20% down on a home to get a mortgage? It’s just one of those myths that have stuck around through the years. Today there are loans that allow much lower down payments and a few that don’t even require a down payment!

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Keep reading to learn the steps you should take to buy a home with less than 20% down on it.

Ask Yourself the Following Questions

Are you a veteran?

This is the first one. If you are and you served at least 90 days during wartime; 181 days during peacetime, or 6 years in the National Guard/Reserves you may be eligible for a VA loan. What’s so special about the VA loan? For starters, you don’t need a down payment. The VA allows lenders to give you a 100% loan and they don’t charge mortgage insurance!

If you are a veteran with enough time served and you have an honorable discharge, check with the VA to see if you have home loan entitlement. If you do, you may have a 100% loan waiting for you!

Do you live in a rural area? Do you make less than the average for the area?

These questions are a little trickier. If you live in a rural area, as determined by the USDA, and you make less than 115% of the average income for the area, you may qualify for a USDA loan. This is another government-backed loan. With the USDA loan, you don’t have to make a down payment – you can get 100% financing.

The eligibility for the USDA loan works a little differently, though. The USDA wants to know your total household income – not just the income of you and your co-borrower. They want to know the total household income because they know that multiple generations often live together and contribute to the household bills. The USDA loan is for low to moderate-income families. If your total household income is higher than 115% of the area’s median income, you wouldn’t be eligible.

The USDA does provide a few allowances though. For example, people with children living with them can deduct $480 from the total household income. This includes children under the age of 18 and over the age of 18 that are in school full-time. You can also deduct $480 for any disabled relatives living with you or $400 for any seniors living with you.

If you are eligible for the USDA loan, you can get 100% financing. You will pay an upfront mortgage insurance fee as well as annual mortgage insurance, paid monthly, so it’s a little different from the VA loan, but you still get 100% financing.

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If you don’t qualify for either of these, move onto the next step.

Qualifying for the FHA Loan

Your next step is to see if you qualify for the FHA loan. This loan allows just 3.5% down on the home and you don’t have to have excellent credit. In fact, the 3.5% down payment doesn’t even have to come from your own income – it can be a gift from a family member or employer.

FHA loans require a credit score of 580 and a maximum debt ratio of 31% on the front-end and 41% on the back-end. These are flexible guidelines, especially with the low down payment required. You can secure FHA financing only for a primary residence, though. The loan program is not for use on a second home or investment home.

FHA loans do charge mortgage insurance. In fact, you’ll pay it twice. The first time is at the closing – you’ll pay 1.75% of the loan amount. Next, you’ll pay it monthly in your mortgage payment. The lender will figure out the mortgage insurance which equals 0.85% of your loan amount and divvies it up amongst your 12 monthly payments.

Trying the Conventional Loan

Your final option for a low down payment loan is the conventional loan. This is the loan that most people think you need 20% down on. While you do need 20% down if you don’t want to pay PMI, you can get by with a down payment as low as 5% and still get the loan.

The difference with the conventional loan is that you need great credit and low debt ratios. The conventional loan requires at least a 680 credit score, a maximum 28% housing ratio and a maximum 36% total debt ratio.

If you qualify, you’ll pay PMI on the loan for as long as you owe more than 80% of the home’s value. Unlike any of the government-backed loans, once you owe less than 80% of the home’s value, you can cancel the PMI and keep the same loan.

There are many options for you to get a loan even if you don’t have a 20% down payment. Go through the options to see which one will suit you the best, and then look for a suitable lender. You may want to get quotes from a few lenders to see who offers the best interest rates and closing costs for your situation.

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FHA Loans Seem Easy – What’s the Catch?

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FHA loans have flexible guidelines. You can even get a loan with a credit score as low as 500. That opens up doors for a lot of people that otherwise wouldn’t qualify for a mortgage. But, what’s the catch? There has to be something, right?

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FHA Guidelines

First, let’s look at the FHA guidelines so you can understand how easy it is to qualify. FHA loans require:

  • Minimum 580 credit score with a 3.5% down payment
  • Minimum 500 credit score with a 10% down payment
  • Maximum housing ratio of 31%
  • Maximum total debt ratio of 41%
  • Proof the home is your primary residence
  • No defaulted federal loans in the past
  • Stable income and employment

That’s all FHA loans require. You don’t need to be a veteran, live in a rural area, or be a first-time homebuyer. You can even accept 100% of your down payment as gift funds if you have a credit score of at least 580.

It all sounds amazing, so there has to be a catch, right? We discuss the potential downsides below.

The Downsides of the FHA Loan

So you can get a loan with a low credit score and high debt ratio. But what do you have to do in exchange for the loan?

It comes down to mortgage insurance. Lenders take a big risk lending you money when you have low credit scores and high debt ratios. That’s a true recipe for default. In exchange for the flexible loan, the FHA requires you to pay mortgage insurance. This isn’t mortgage insurance like you would pay on a conventional loan. It’s insurance you pay for the life of the loan. In other words, unless you refinance the loan or sell the house, you’ll pay mortgage insurance.

You pay the mortgage insurance directly to the FHA. They charge it in two ways:

  • Upfront mortgage insurance
  • Annual mortgage insurance

Upfront mortgage insurance is a one-time charge. You pay it every time you take out an FHA loan. Right now, borrowers pay 1.75% of the loan amount. If you have a $200,000 loan, you pay $3,500 at the closing. You can get assistance from the seller, a family member, or a down payment assistance program if you don’t have the funds. You may also be able to wrap it into your loan amount. Just be careful if you choose this option. When you increase your loan amount, you increase your monthly payment as well as the amount of interest you pay over the life of the loan.

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Annual mortgage insurance is what you pay for the loan’s term. It’s equal to 0.85% of your loan amount. You pay this amount based on the average principal balance for the year. This means the amount you pay does decrease slightly every year as you pay down the principal balance, but you’ll pay premiums until you pay the loan off in full.

Compare this option to conventional loans. Yes, you have to have higher credit scores, but you are rewarded for those higher scores with mortgage insurance you can cancel. You can put down as little as 5% on a home and you will pay mortgage insurance. But, you can cancel it once you owe less than 80% of the home’s original value. In order to get out of FHA mortgage insurance, you must refinance into a conventional loan.

The final ‘catch’ or downside is the fact that some sellers don’t like FHA loans. They still believe the common myths that sellers have to pay all of the closing costs or that their home has to be perfect. Neither is true, but it’s a reputation that FHA loans have carried through the years. You may come across sellers that won’t accept FHA financing, which may limit the houses you can buy.

The FHA Advantages

Of course, FHA loans have so many advantages that greatly outweigh the downsides including:

  • Low down payment requirements
  • The ability to accept gift funds
  • The ability to get financial assistance from the seller
  • High debt ratio allowances
  • Low credit score requirements

FHA loans are among one of the most flexible programs available today. It’s worth looking into and comparing it to your other options, especially if you don’t have the credit score (typically at least a 680) to qualify for conventional financing. FHA financing is often the next best option for borrowers.

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