With mortgage rates and housing prices remaining stubbornly high, many potential first-time buyers are wondering whether homeownership is in the cards for them, or if they’re destined to pay rent forever. For most of these would-be homeowners, it’s not the monthly costs (like taxes and mortgage payments) that are preventing them from putting their name on a deed. It’s the down payment.
The down payment is the initial lump sum a buyer pays during a real estate transaction, and it almost always represents a significant percentage of the total purchase price. While the conventional down payment is 20%, buyers who believe they are locked out of the housing market because they don’t have that much cash on hand are doing themselves a disservice.
Do you know what’s out there in terms of housing loans and down payment requirements? Take our quiz to test your knowledge and get a taste of what’s available.
Are there loans designed to help first-time buyers?
A. Sure, if it’s your first rodeo, there are programs out there to help.
B. No. You don’t get a free pass just because you’ve never done this before.
C. First-timers don’t get special loans, but are guaranteed lower mortgage interest rates determined by an income-based formula.
Answer: A
First-time buyers can qualify for a variety of down payment assistance loans. Many charities and local government programs offer them, with varying requirements, but in general you’ll need to be low income and buying your first property to qualify.
What is unique about the loan options available to veterans of the U.S. Armed Forces?
A. They may allow veterans to purchase a home with no money down.
B. They can be used only for the purchase of your first home.
C. There aren’t any unique loan options available for veterans.
Answer: A
Veterans of the U.S. Armed Forces may qualify for a VA loan, a special loan offered by the Department of Veterans Affairs that allows those who have served the country to buy a home without a down payment. There is fine print, of course: The sales price can’t be higher than the home’s appraised value, and not all mortgage lenders will offer this loan. Other perks include a limit on closing costs and the ability to access the programs repeatedly. VA loans were once more complicated to close and considered risky, leading to a stigma that lingers today. But today they are generally as streamlined as traditional loans and are backed with the same risk protection.
If I want to buy in a rural area, are there potential benefits when it comes to home loans?
A. No, there are no benefits available simply because you want to buy in a rural area of the United States.
B. Only if you are breeding exotic livestock or engaged in organic farming.
C. There certainly are — you could avoid paying a down payment, for one.
Answer: C
If you’re looking to purchase in a rural area, you could qualify for a USDA loan, offered by the U.S. Department of Agriculture and designed for lower-income buyers. Guaranteed USDA loans back 90% of your mortgage and allow you to receive a 30-year, fixed-rate loan with no money down. To qualify, your income can’t exceed 115% of your area’s median income, and the home you want to buy needs to be “modest.” If it’s too large or has an in-ground swimming pool, you’ll be disqualified. Another variety, the Direct USDA loan, requires a designation of low income or very low income (actual salary limits will vary depending on your location). It almost always requires a credit score of at least 640 and is limited to those looking to finance a home that is 2,000 square feet or smaller.
What about buyers who have a reliable income, good credit and a history of steady earnings, but not enough cash on hand to afford a 20% down payment? Are there programs for them?
A. Loan assistance programs exist, but only for those in dire financial straits.
B. Yes, there are options for reduced down payment loans for buyers like these as well.
C. No, not for buyers on the path to financial stability. If this is you, stay on it and save up.
Answer: B
Down payment assistance isn’t limited to low-income buyers. If you’re looking to buy your first home and you have strong qualifications — a credit score of 620 or higher and a financial history showing you’ve had reliable income for two years or more — you could qualify for a Conventional 97 loan (sometimes called 97% LTV Standard) from Fannie Mae and Freddie Mac. It provides a 30-year fixed-rate mortgage with just 3% down.
The Bottom Line
There is no one-size-fits-all formula for homeownership, and just because the pathway to saving up a substantial nest egg might be the most well-trod, it doesn’t mean there aren’t other routes. If you’re a buyer who is well qualified to make monthly payments but feeling shut out from the housing market by a lack of upfront cash, ask your lender about low- or no-down payment loans, and also look into government grants and loans that can help make your dream of homeownership a reality. You might be surprised by the options available.