What Are the Loan Down Payment Requirements?

The requirements vary, depending on the loan program. A loan from the Veteran's Administration (VA Loan) requires ZERO Down. There are also ZERO Down loans available from Fannie Mae, Freddie Mac and the Farm Home Administration (not to be confused with FHA, Federal Housing Authority). All Zero Down loans require some form of mortgage insurance.

For Fannie Mae & Freddie Mac loans mortgage insurance is required on all loans with a loan-to-value (LTV) greater than 80% 

Mortgage insurance is required on all FHA, VA and Farm Home loans, regardless of the down payment. This is why anyone with a down payment greater than 5% should consider the merits of a loan underwritten to Fannie Mae or Freddie Mac guidelines. 

Why Mortgage Insurance Makes Low Down Payment Loans Possible?

Mortgage Insurance (MI) protects mortgage companies against financial loss if a homeowner should stop making mortgage payments. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage company loses a customer and a source of income. When foreclosure occurs the mortgage insurer will then have to pay the mortgage company's claim on the defaulted loan. 

For this reason, it is crucial that the borrowers can really afford the home they're buying, not only at the time it is purchased, but throughout the term of the loan. 

Although the homebuyer pays the cost of mortgage insurance, the mortgage insurer works directly with the mortgage company. Mortgage insurance is available to commercial banks, savings & loans and mortgage bankers, all of whom offer mortgage loans to homebuyers. 

Remember that mortgage insurance is NOT the same as credit life insurance, (also called mortgage life insurance). Credit life insurance repays an outstanding mortgage balance upon the death of the person who took out the insurance policy. 

The Secondary Market

The mortgage company's decision to use mortgage insurance is driven by the requirements of investors in the mortgage market. Because of the losses that could occur, major investors require mortgage insurance on all loans made with low down payments. 

The three primary investors in home loans are Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae). By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country. 

Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages. It adds the guarantee of the full faith and credit of the U.S. Government to mortgage securities issued by mortgage companies. 

The Two Choices: Government Insurance and Private Insurance

Now that we have explained how mortgage insurance works and why it is necessary, let's look at the basic kinds of mortgage insurance. Low down payment mortgages can be insured in two ways -- through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA). 

Although anyone can apply for FHA insurance, the other two government mortgage guarantee programs are much more targeted toward specific borrowers. The VA program is limited to qualified, eligible veterans and reservists. This program is very specialized, so contact your mortgage professional for the details. The FmHA insures loans for the construction and purchase of homes in rural communities. 

Obtaining conventional financing is the alternative to obtaining a home loan backed by the government. Conventional mortgages are home loans not guaranteed by the government, including those guaranteed by private mortgage insurers. 

Although government and private insurance are based on the same concept of allowing families to get into homes with less cash down, there are many differences between the two. Often, your mortgage professional will play an important role in suggesting and deciding which insurance is selected. 

Private mortgage insurance is available on a wide variety of home loans and there is no pre-set limit on the loan amount. Although differences such as these may affect whether the mortgage company prefers to work with government or conventional mortgages, your mortgage professional will discuss which one would be better for your situation. 

With the wide variety of loans available, homebuyers have the freedom to choose the type of loan that best suits their needs. Early in the homebuying process, it is a good idea to meet with several companies to compare the types of mortgages they offer and shop for the best price and terms. Best of all, working with a mortgage insurer can be very easy, whether the FHA or a private mortgage insurance company insures your loan, because your mortgage professional handles all of the arrangements. 

By making lending money to homebuyers safer, mortgage insurance helps more families get into homes of their own. 

Down Payment Loans and Gifts

There are loan programs that allow loans and gifts to be used as part of your down payment. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into a down payment account. 

Another popular tactic, which can be used in a wider range of programs, is to borrow from your 401K program. If you have a 401K program with your employer, you can withdraw without a penalty for your down payment and pay it back over a specified period. There are some drawbacks, the payment will be used in qualifying and your 401K account will not continue to grow as fast. Even with these drawbacks, it is often a smart move if this is your only option. 

Qualifying for a Low Down Payment Loan

To be considered for a low down payment loan, you generally need to have: 

*Sufficient income to support the monthly mortgage payment. 

*Enough cash to cover the down payment.

*Sufficient cash to cover normal closing costs and related expenses (explained below).

*A good credit background that indicates your payment history or "willingness to pay." 

*Sufficient appraisal value, which shows the house is at least equal to the purchase price. 

*In some instances, a cash reserve equivalent to two monthly mortgage payments.

Closing costs, or settlement costs, are paid when the homebuyer and the seller sign the final documents at closing. On the average, closing costs run approximately 2% to 3% of the house price. This percentage may vary, depending on where you live. 
Closing costs include the loan origination fee (if not already paid), points, prepaid homeowner's insurance, appraisal fee, lawyer's fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20% down) and other expenses. Your mortgage professional will give you an exact estimate of your closing costs. 

Points are finance charges calculated at closing. Each point equals 1% of the loan amount. For example, 2 points on a $100,000 loan equals $2,000. Companies may charge 1, 2 or 3 points in up-front costs in addition to the down payment. The more points you pay, the lower your interest rate will be. In some cases, you may be able to finance the points. 

Down Payment Assistance & Cash Grant Financing

Many local and state agencies run bond programs to generate funds to help individuals and families with a down payment. Contrary to public thinking, these bond issues are not a type of welfare. The government knows how tough it can be to buy a first home, especially on a limited income. 

Most agencies are income sensitive, but you may be surprised by the high level of acceptable income. The income level is especially high if you have children or dependents. Most agencies also have purchase limits, but they are adjusted according to income qualifications. 

If you are able to obtain down payment assistance, you may receive a lower interest rate. The drawback is that it often takes quite a bit of work with extra paperwork and mandatory education classes. Our advice is to find a realtor or mortgage professional who is familiar with both the local and state agencies and their policies. 

Anyone qualifies for Cash Grant Financing. If you can qualify for the transaction, you can qualify for a Cash Grant. Often, the home seller provides the Cash Grant. In these cases, the seller contributes a certain percentage of the purchase price of the home to a non-profit agency and the non-profit agency makes a Cash Grant (virtually a gift) to you. Since it is a Cash Grant, the money received is yours to use as you wish and never needs to be paid back. Typically the buyer utilizes a gift from a non-profit agency as money for down-payment and closing costs.