Before you ever start shopping for a house, you’ll need to figure out how to pay for it. The process of getting a mortgage can be pretty complicated, especially for someone who has never done it before. Working with a knowledgeable and responsive mortgage lender or bank officer can really help. They can help you to find the cheapest way to buy a house based on your financial situation.
There are many loan options available for people with less than stellar credit, or little money for a down payment. We have highlighted a few here, but to see a longer list, check out: How to Buy a House with Little to No Down Payment (2018 Guide).
The two most popular types of low down payment loans are FHA and VA loans. There are also other types of loans with slightly more stringent requirements. You should explore any and all options that might apply to your situation.
One of the most popular programs that exists is the FHA Loan program. An FHA loan is one that is insured by the Federal Housing Administration. This program was created in response to an explosion in foreclosures that happened in the 1930s. The goal was to make mortgages more accessible for people with lower credit scores or not a lot of money in the bank.
The best first step is to find a lender who is well-versed in FHA loans to help you navigate the process. We have compiled a list of resources and tips for you here.
The exact terms have changed over the years, but typically you only need 3.5% down payment to purchase a home. Let’s say your budget for a house is $150,000, that would mean you need only about $5,000 for a down payment. This is still a good chunk of money, but it is way more manageable than the $30,000 that a traditional mortgage would require.
One small caveat about FHA loans is that the borrower needs to pay mortgage insurance in addition to the principal and interest. This helps to insure the loan should the borrower default and the loan end up in foreclosure. Since the federal government is insuring the loan, they wanted to make sure that they were protected.
What do I need to qualify for an FHA loan?
In order to qualify for an FHA loan, there are some basic criteria that need to be met. The borrower must:
- Have a steady employment history
- Have a valid social security number
- Pay a minimum down payment of 3.5%
- Have a minimum credit score of 580
In addition to requirements of the borrower, the property that the borrower wishes to purchase must also meet minimum requirements. They are summarized by the words: safe, sound, and secure.
- The condition of the house and property must be safe for its occupants. This means no mold, asbestos, lead, etc.
- The property needs to be structurally sound. It cannot be rotted, decaying, or otherwise falling down.
- The home should be considered a secure investment for a mortgage loan.
This may seem like a lot of boxes to check and hoops to jump through, but if it helps you to become a homeowner with a low credit score and minimum down payment, it is well worth it.
VA loans are loans provided to Veterans of the United States and in some cases their spouses. This one of the largest, and most powerful type of loans backed by the government. The Department of Veterans Affairs award over 700,000 loans each year.
To qualify for this loan, you must have served in one of the Armed Forces (army, navy, marine corps, air force, coast guard) for a specific amount of time. The time limits depend on when and how you served. Minimum conditions are:
- 90 consecutive days of active service during wartime
- 181 days of active service during peacetime
- More than 6 years of service in the National Guard or Reserves
- Spouse of a service member who died in the line of duty or as a result of a service-related disability
Unlike FHA loans, there are no minimum income thresholds to apply for the loan. During the review process, however, your lender will do calculations that make sure that you have enough money to cover your expenses, including your mortgage payment.
VA loans offer slightly better benefits than FHA loans in that it does not require a down payment or mortgage insurance. An mortgage lender who regularly works with VA loans is a great resource for you to use when trying to determine how much house you can afford and what your payments will look like.
Similar to FHA and VA loans, USDA Loans are a great option for people looking for a low down payment. The US Department of Agriculture backs these loans and they come with one primary requirement. You must be looking to purchase a home in a rural area. For people who are already looking to buy a farm or a home on the prairie, this mortgage could be the perfect fit!
The HomeReady mortgage is provided by Fannie Mae, a huge national mortgage lender. The credit score requirements and minimum income limits are more strict than some of the other programs. However, this program only requires a 3% down payment. Additionally, when calculating income, you can include anyone in your household. For multi-generational households, this means you can count your parents’ or children’s income.
Buying a home may seem like a scary process, but there are lots of programs out there to help you through it and provide some financial assistance to do so! If you are a first-time homebuyer, it’s worth checking out this list to see what you may qualify for.
If you are looking for the cheapest way to buy a house, the most important thing you can do is find a lender that you trust and enjoy working with. They have lots of information at their fingertips and their goal should be to help you find the best loan program for you and your situation.