For those who already have a good credit score to buy a house:
In the market for a new home? Is your credit score good enough that you aren’t asking, “Do you need good credit to buy a house?” Several options exist today that allow borrowers with good credit to buy a home with little or zero down, as long as they meet other underwriting requirements.
Low Down Payment Loan Options
Until recently, the FHA loan was the best option for homebuyers who wanted to purchase a home with a small down payment. However, in the past six months, Fannie Mae and Freddie Mac have introduced new alternatives to the FHA.
With an FHA loan, borrowers need a down payment of at least 3.5 percent, but the qualifications are less stringent than they are for the Fannie Mae and Freddie Mac 3 percent programs. For example, borrowers don’t have to meet income level requirements or be first-time homebuyers to qualify, and the borrower’s credit score can be as low as 580.
FHA borrowers must pay a private mortgage insurance (PMI) fee up front (1.75 percent of the full amount of the loan) and a monthly PMI fee, which insures the lender in case of default. To compete with Fannie and Freddie, FHA recently lowered its monthly PMI payment from 1.35 percent to 0.85 percent of the full loan amount on 30-year fixed mortgages for borrowers who make a down payment of 5 percent or less. With an FHA loan, PMI payments last for the life of the loan.
Borrowers with higher credit scores will pay less, overall, for the new Fannie Mae and Freddie Mac loans.
Fannie Mae has two 3 percent down options: its standard 97 percent loan or the My Community Mortgage. Both were introduced last December as alternatives to the FHA, and both loans are available to first-time homebuyers only (at least one co-borrower must not have owned a home in the past three years). Fannie Mae requires a credit score of at least 620, and borrowers may not exceed certain income limits.
Unlike Fannie Mae, Freddie Mac’s new 3 percent down program is available to repeat buyers with low and moderate income levels, in addition to first-time homebuyers. However, Freddie Mac’s programs are similar to Fannie Mae’s in other ways.
- Home Possible, which became available last December, requires a 5 percent down payment for buyers in the market for a 1 to 4-unit primary residence, including a house, condo, PUD (planned unit development) or manufactured home.
- Home Possible Advantage, Freddie Mac’s 3 percent down loan, became available in March, and only those purchasing a 1-unit primary residence are eligible. Borrowers must have at least a 660 credit score, and first-time buyers must participate in a homeownership education program.
With the Freddie Mac and Fannie Mae 3 percent down loans, borrowers can choose either to pay one upfront PMI fee accompanied by a slightly higher loan interest rate, or a monthly PMI fee that stops when twenty percent equity is achieved. Freddie Mac and Fannie Mae both allow gifts and grants to be included in the down payment.
Down Payment Assistance
Otherwise creditworthy borrowers who seek assistance with the down payment will find options that vary state-by-state and county-by-county. Many of them come in the form of a second loan, which means the borrower will need to again meet loan guidelines, but repayment plans are generally designed to be non-burdensome.
For example, California borrowers who qualify can take out a CHDAP loan, which covers a down payment up to 3 percent of the purchase price and requires no payments until the primary mortgage is paid off or the home is sold (simple interest accrues).
The CalPLUS FHA loan is a similar piggyback loan program in which the junior loan covers a down payment of up to 3.5 percent, but the interest rate is zero.
Qualified Arizona borrowers can apply for the Home Plus home loan program, which includes a grant (non-repayable) of up to 5 percent to assist with the down payment and closing costs.
Google “[your state] down payment assistance” to find programs available in your area.
Borrowers take note:
- The higher the down payment, the lower the monthly payments
- The higher the borrower’s credit score, the lower the loan’s interest rate
- Some lenders will not approve a first mortgage that uses a second mortgage for a down payment
- Some lenders maintain stricter lending guidelines than those outlined by these programs
Finding the Right Mortgage Loan
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