3 types of loans that can help you buy a house when you can’t afford a full down payment

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Coming up with the cash for a down payment can be a big hurdle for anyone hoping to become a homeowner.

Most financial experts recommend aiming for a 20% down payment to avoid paying extra each month for private mortgage insurance. If you feel like it may be impossible to save up that much, you’re not alone. The typical millennial homebuyer put down an average of 8.8% of their home’s purchase price as of December 2018, according to Realtor.com data.

Luckily, there are alternatives to a conventional mortgage that can help you buy a house with no money down. The US government offers home loans for homebuyers in a financial squeeze, but of course, there are some trade-offs. While these loans may come with favorable terms, like lower interest rates, there’s usually a high standard for qualification. Obtaining one of these loans also doesn’t let you off the hook completely, as you still need cash to cover closing costs, and once you’re in the home, monthly mortgage payments.

Below are three of the most common government-backed loans for homebuyers, which are offered by a variety of lenders nationwide. Note that many states offer their own home-loan assistance programs as well, specifically for first-time homebuyers.

Veterans Affairs (VA) loan

Active and former members of the military have access to the Veterans Affairs (VA) loan to finance a home purchase up to $484,350 in 2019, often with a lower interest rate than a conventional mortgage. This loan requires no down payment and no mortgage insurance, but comes with strict guidelines, including abiding by the "minimum property requirements" standard.

The buyer must also pay a "funding fee," which protects the lender in case of default. The exact fee amount depends on the buyer’s military service, down payment amount, and whether they’ve had a VA loan in the past, and is expressed as a percentage of the total loan (it’s usually below 3%), explains NerdWallet. The fee can be paid upfront or tacked on to the total loan amount.

Closing costs are usually limited with a VA loan, though the buyer is still responsible for paying them in most cases.

United States Department of Agriculture (USDA) loan

The US Department of Agriculture (USDA) loan helps people in rural areas buy homes with zero money down. To qualify for the Single Family Housing Guaranteed Loan Program, you have to meet certain income requirements — described as "low-to-moderate" income — which vary by state. The USDA is fairly liberal with its definition of "rural" and even considers some suburban areas (you can check specific addresses using this map on the USDA website).

There’s no minimum credit score to obtain a USDA loan, although a score of 640 or higher and a debt-to-income ratio below 41% typically qualifies for automatic underwriting, according to USDAloans.com.

Despite zero down payment obligation, the buyer is expected to pay an upfront "funding fee" equal to 1% of the total loan amount to protect against default, plus a USDA-specific 0.35% fee that’s calculated as a percentage of the loan amount each year, but tacked on to monthly payments and paid to the mortgage lender.

Federal Housing Administration (FHA) loan

The Federal Housing Administration (FHA) loan allows buyers to put down just 3.5% of the purchase price of a primary residence, but requires a credit score of 580 or higher and a debt-to-income ratio below 43%. If you have a credit score between 500 and 579, you have to put down 10%.

FHA loans do require private mortgage insurance — made as one upfront payment plus monthly payments — and will also usually come with a higher interest rate than a conventional mortgage would. The buyer is also responsible for closing costs.

The maximum FHA loan amount varies by location, but for a single family home ranges from $315,515 in a low cost area to $726,525 in a high cost area in 2019.

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Source: Business Insider – tloudenback@businessinsider.com (Tanza Loudenback)

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