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There are many home loan options for buyers, mortgage types for every need and preference. But while there are many choices, the real issue is finding the top option that best fits your financial situation and for which you are qualified.
It might seem as though lenders are always looking for the perfect borrower, but that’s not the case. Few loans would be made if only borrowers with flawless finances could get a mortgage. The result is plenty of loan programs that make borrowing easier when paired with the right borrowers.
Low Down Payment Mortgages
Most of us don’t have enough cash to buy a home with 20% down plus closing costs. About 15% of all existing homes were bought for cash in late 2023 according to the National Association of Realtors.
But for the 85% that do not make an all-cash purchases – financing is necessary, and in many cases that means loans with as little down as possible.
There are plenty of options that require little down. VA and USDA financing generally require 0% upfront, while most FHA loans can be obtained with 3.5% down.
The HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs offer financing with 3% down. Conforming loans – loans that can be sold to Fannie Mae and Freddie Mac – are available with 5% down plus private mortgage insurance.
Down Payment Assistance (DPA) Programs
Homeownership is widely considered a social good; as a result, money is often available to help individuals buy a home. Down payment assistance programs – DPAs – can be in the form of outright cash grants, interest-rate subsidies, second loans that may not have to be repaid, etc.
Many DPA programs are designed to help first-time borrowers, but there’s a twist: You can be a “first-time” homeowner and yet have once owned a home. This happens because the term “first time” is defined by many DPA programs to mean someone who has not owned a home in the past three years.
Lenders welcome DPA assistance and generally allow such funds for down payments. This is important because borrowers are typically required to provide their own down payment money, except in two situations: if they get money from friends and family or help through a down payment assistance program.
While borrowers have a great interest in financing with little down, it’s necessary to consider both the down payment AND closing costs when financing a home. Closing costs – the various loan charges, taxes, title expenses, and settlement fees – can add up to big money, in some cases more than the down payment itself.
Off-setting down payment requirements makes more cash available for other closing costs.
» MORE: See today’s refinance rates
Co-signers and Mortgage Qualifying
Sometimes mortgage help is close at hand. If you know someone with the credit and willingness to act as a co-signer, many mortgage application problems can disappear.
Co-signers – perhaps a family member or a friend – provide credit. The result is that a strong co-signer can strengthen a loan application if you have a low credit score or impaired credit.
If the prime borrower does not make payments or in an extreme case is foreclosed, the co-signer is responsible for repaying the entire debt. If the prime borrower has missed or late payments, such events can negatively impact the co-signer’s credit standing.
Asking someone to act as a co-signer is a big deal. Be sure the other party understands the pros and cons of such a commitment by having them first speak with a fee-only financial planner or an attorney who specializes in real estate.
Low Credit Scores & Mortgage Rates
Low credit scores are a major hurdle for millions of households but no lender expects a perfect 850. In October 2023 the average FICO score was 718 according to the company, and you can bet that many mortgage borrowers got financing with such scores – and less.
One catch is that low scores mean high rates. A second is that low scores represent more risk, something lenders want to avoid.
You can see this with FHA mortgages. You can get FHA-backed financing with 3.5% down if you have a credit score of 580 or above. However, you can also get FHA financing with 10% down if you have a credit score between 500 and 579.
At least that’s the theory. In practice, the odds are not with borrowers who try to finance with low scores. In fiscal year 2023, only 1.53% of all forward FHA loans had scores below 580.
For those with scores between 620 and 679, the odds were much better – they got more than 50% of all FHA forward loans.
What’s important here is that credit scores are flexible. They go up and down, a key piece of information for savvy borrowers. How can you move your score higher? Take these three steps.
First, visit AnnualCreditReport.com. There you can get credit reports from Equifax, Experian, and TransUnion once a week.
Check for out-of-date items and factual errors. Good credit reports are the basis of high credit scores. If something is wrong, contact the credit reporting agency to report the problem. Then check your other reports to see if the same issue shows up elsewhere.
Second, good credit scores are based on several factors including full and timely payments, how much you owe, whether you recently took on additional credit, and the length of your credit history. You can move several of these factors in your favor by establishing a budget, spending less, saving more, and always making payments in full and on time.
With better credit you can get big rewards in the form of lower mortgage rates and smaller monthly payments.
Third, keep cash on hand. Saving $10 a week will give you $500 in a year for small emergencies – something millions of households don’t have.
How do we know? Lots of people borrow from payday lenders. As The Pew Charitable Trusts reported in 2016, “The average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375. The average fee at a storefront loan business is $55 per two weeks.”
Pew also noted that the average interest rate for a payday loan was 391%.
If credit scores are an issue, start working on them well before speaking to a mortgage lender. Consider the FHA, VA, and USDA mortgage programs if your score is low.