Getting a home loan requires more than an excellent credit score and sufficient income. While these factors weigh heavily in the decision process, getting a home loan also requires a down payment. Down payment minimums vary by lender and loan type. Mortgage lenders traditionally ask for 20 percent down. If you're unable to drum up the cash, explore low down payment mortgage loans.
20 Percent and PMI
While a 20 percent down payment is a financial stretch for many home buyers, it does provide benefits. Buyers who put down less than 20 percent are required to pay private mortgage insurance, or PMI. This insurance protects mortgage lenders in the event of default. PMI costs between .05 percent and 1 percent of a mortgage balance. Mortgage lenders include this fee in mortgage payments, which increases a borrower's monthly housing expense. A down payment of 20 percent eliminates PMI.
When Do Lenders Require 20 Percent?
Many mortgage lenders have relaxed their down payment requirements. This allows more people to qualify for home loans and realize their dream of ownership. As of 2012, conventional mortgage lenders only required a 5-to-10 percent down payment, but they require higher down payments in some situations. While PMI makes it possible for many borrowers to get a loan without 20 percent down, borrowers need a minimum credit score between 660 and 700 to qualify for private mortgage insurance. Conventional mortgage lenders will approve borrowers with credit scores as low as 620. But since these borrowers cannot obtain private mortgage insurance, mortgage approval for them is subject to a 20 percent down payment.
FHA Mortgage Loan
Borrowers who cannot afford a 5-to-10 percent down payment have another option. These buyers can apply for a mortgage loan backed by the Federal Housing Administration (FHA). This federal agency does not issue funds. A mortgage lender writes the loan, but the FHA insures or guarantees repayment to the lender. This backing by the federal government lowers a lender's risk, allowing the mortgage company to offer mortgage loans with lower down payments. Borrowers only need a 3.5 percent down payment to qualify for an FHA mortgage loan.
Zero Down Mortgage Loans
Borrowers who apply for either a VA home loan or a USDA home loan can obtain a property with no money down. These loans aren't available to everyone, and borrowers must meet specific requirements. VA home loans provided by the U.S. Department of Veteran Affairs are only available to veterans, active duty personnel, reservists, National Guard members and some surviving spouses. USDA loans are offered by the U.S. Department of Agriculture. To obtain this type of loan, borrowers must purchase a home in an eligible rural area, and their income cannot exceed the limit for the area.
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