Low Down Payment Programs

Mike Cass

Down payment In Detroit Lakes: I hear so many presentations on low down payment options from lenders, can you summarize the major programs for me?

Cass: One of the biggest obstacles to home ownership is coming up with the down payment, but there are a number of widely available programs to help with that. Not every lender offers every program below, but they are widely available.

FHA – This is generally considered the go-to first-time homebuyer program because it allows for a down payment as low as 3.5 percent. The down payment funds may also come from someone else in the form of a gift , so long as that gift has no expected or implied repayment of the funds to the donor by the borrower.

There is some scrutiny of the gift giver – which can include the borrower’s relative, borrower’s employer or labor union, a close friend with a clearly defined and documented interest in the borrower, a charitable organization or a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time homebuyers

A major benefit of FHA lending is allowing for lower credit scores and higher qualifying ratio’s than most other programs so you can get more qualified borrowers.

USDA – The United States Department of Agriculture (USDA) offers a home mortgage program with down payments as little as 0 percent … can’t get much better than that! The only caveat is the home you are purchasing has to be located in an eligible rural area. The link below can you help walk you through that search process. There are other qualifying criterion as well, your loan officer can help with these. https://eligibility.sc.egov.usda.gov

VA – The Veterans Administration (VA) also offers 100 percent financing options, but you must demonstrate a history of military service to qualify. You don’t need to be current active service, and the benefits are incredible, so you always want this option on the table if possible.

Bond Loans – Here in Minnesota the most commonly used bond program is the one offered by the Minnesota Housing Finance Agency (MHFA). The credit standards are a little stricter than FHA, but it does allow for down payment assistance so you don’t have to necessarily get a gift source. This program has a bit of a “goldilocks zone” regarding income to ensure the borrowers have enough money to make their payments, but not so much income that they become disqualified from this program.

MHFA is a wide ranging housing assistance program and can help with a purchase, refinance, as well as home improvements. There are other excellent bond loan programs based on geography and funding source, but MHFA is available statewide. http://www.mnhousing.gov

Conventional Programs With 3 Percent Down Payment – Each of the above programs are government backed or subsidized, but if you look to conventional programs that are not sponsored by the government, you might consider Fannie Mae’s Home Ready program or Freddie Mac’s Home Possible. Each of these programs allow for as little as 3 percent down payment and like FHA they allow for flexible sources for that down payment. These programs also allow for the possibility of being able to drop or cancel the cost of mortgage insurance without having to refinance the loan, which can be a nice benefit as your equity in the home increases over time. These programs are also not as restrictive on income, allowing for higher income households to qualify. The downside, compared to some government programs, are stricter underwriting standards.

Down Payment Assistance Programs (DAP) – Up to this point, we have talked about different mortgage programs with low or no down payment features. Another path to consider would be pursuing some of the many different down payment and closing cost assistance programs that are out in the various communities to encourage home ownership. The Minnesota Homeownership Center offers a nice search tool on their site to help you locate available programs and the qualifying criterion for each program as well as solid advice for homebuyers: http://www.hocmn.org/buyingahome/down-payment-assistance-in-minnesota/

This is by no means a comprehensive list of your options and the details behind each of them. I strongly encourage every REALTOR I meet to push their home shoppers to a lender they trust before they take that shopper out to look at homes to increase their chances of a successful house hunt.

Mike Cass invites you to submit your questions to be addressed in future columns. Questions may be edited for space or clarity. Send your questions to mcass@resultsmortgage.com. Mike Cass has served in various mortgage roles including loan origination, loan processing, underwriting, closing, post-closing and finance. He draws on these experiences as president of Results Mortgage LLC, a Twin Cities based lender.