Homeownership in the United States has fallen to a generational low, and a big reason for this is a lack of first-time homebuyers. In a recent survey by Trulia, 54% of renters cited "saving enough for a down payment" as their biggest obstacle to homeownership, more than credit requirements and other debt obligations. However, the idea that a big down payment is a requirement is a myth. Here are some options you should explore if you want to buy a home, but don't have a ton of cash.
Conventional loans with as little as 3% down
Conventional mortgages -- that is, those not guaranteed by the government and that conform to Fannie Mae or Freddie Mac's lending standards -- were quite difficult to get in the wake of the financial crisis. This was especially true if you didn't have 20% of the home's purchase price to put down.
Fortunately, it's gotten easier again in recent years. Conventional mortgages are now available with down payments as low as 3% thanks to programs from Fannie Mae and Freddie Mac. You'll probably have to pay private mortgage insurance (PMI) until your loan-to-value ratio drops below 80%, but this is a good option for borrowers who qualify.
To qualify for a loan with 3% down, you'll need a credit score of at least 660, plus six months' worth of mortgage payments in reserve. In addition, your total monthly debt payments -- including your new mortgage payment -- cannot be greater than 36% of your gross income. With a higher credit score, the reserve requirements can be relaxed and the debt-to-income maximum could be as high as 45%.
FHA loans: Pricier, but good for poorer-credit buyers
If your credit isn't good enough to qualify for a conventional loan, a FHA mortgage may be an option. The down payment requirements are as low as 3.5%, and the funds can come from the seller or a gift.
Credit requirements for a FHA loan are relatively low. You can get a 3.5% down loan with a FICO score as low as 580, and you can get financing with an even lower score if you have 10% to put down.
The downside is the cost. FHA mortgage insurance premiums for a 30-year loan with 3.5% down are 0.85% of the outstanding balance per year, which is competitive with the PMI you would pay on a conventional loan, but there are two big caveats. First, while you can drop PMI after you pay down 20% of the home, your FHA mortgage insurance payments generally continue for the life of the loan. Second, you'll also pay an upfront mortgage premium equal to 1.75% of the loan amount.
VA and USDA: 100% financing for those who qualify
Veterans Administration loans are available to active-duty or retired military personnel who meet certain service requirements. Reservists can also qualify after serving for six years. If you qualify, a VA loan requires no down payment whatsoever, nor does it require mortgage insurance, so it's usually a smart choice for those who can take advantage of it.
U.S. Department of Agriculture loans are another 0%-down financing option, available to low- to middle-income homebuyers in areas that are defined by the USDA as "rural." There technically isn't any mortgage insurance needed with a USDA loan; however, you will have to pay an upfront and recurring "guarantee fee." Check the USDA's website for specifics and to determine whether a particular home would qualify.
Individual banks offer other options
In addition to the loan products I've already discussed, several banks have their own loans designed for aspiring homebuyers without a lot of cash to put down. For example, Regions Financial (NYSE: RF) offers its "Affordable 100" loan program, which provides 100% financing and with no mortgage insurance to borrowers with excellent credit.
I found out about the Regions program because someone used it to buy the last house I sold -- so these lender-specific programs do exist, and are being qualified for by actual, everyday homebuyers, not just an elite few. BB&T (NYSE: BBT) is another lender that offers a similar program with 97% financing to low- and moderate-income borrowers. I'm sure there are others, so it could be worth the time to check with your local and regional banks to see what unique programs they might offer.
Which is best for you?
In general, a VA loan is best if you qualify for one. If you aren't a veteran, but have decent credit, a conventional loan is typically a better choice than an FHA loan. And an FHA loan means that you don't need excellent credit or much money upfront, so if you can't qualify for any of the other options, it may be your best bet. Of course, don't forget to check with banks in your area to see what they offer.
The bottom line is that even if you don't have tons of cash in the bank, there are several options available to help you become a homeowner, so don't let a lack of savings keep you in a rented home you don't want to be in.