While the USDA and VA mortgage programs require zero down payment when purchasing a home, the two most popular government-backed mortgage programs, FHA and Fannie Mae/Freddie Mac, do require down payments. The minimum FHA down payment amount is 3.5% of the purchase price and in most cases you need 5% of the purchase price as a down payment for Fannie/Freddie loans. Because many families have trouble saving up 3.5-5.0% of the purchase prices, there are down payment assistance (DPA) programs that have popped up all over the country.
First, there are the USDA and VA mortgage programs to check out
There is no DPA program sponsored by the federal government that works throughout the country. Rather all current government-backed DPA programs are sponsored by either city, county, or state governments. Because of this, there are no uniform rules when it comes to DPA programs — the availability and terms of DPA programs depend on the city, county, or state you live in.
In the vast majority of cases, DPA programs are not “free money”. Rather, it is common for the programs to pay for themselves by charging significantly higher interest rates than the rates one would get by coming up with a down payment on one’s own (through savings or help from family). The problem with significantly higher interest rates is it could cost a borrower vastly more in interest paid over the life of the loan than the DPA money they are getting up front. In addition to higher interest rates, some DPA programs also charge up front fees that roll into the new loan.
Because of these things, it is extremely important for borrowers to ask a lot of questions before diving into a local DPA program.
Second, in many cases borrowers who are looking at FHA or Fannie/Freddie loans would be better off saving up a little longer or getting gift funds from family/friends to cover the down payment rather than use the local DPA program. Gifts from family are acceptable sources of down payment money (even if one intends to pay the gifter back eventually). If avoiding a DPA program means getting a significantly lower interest rate, the extra effort often pays off in the long run.
Contact us on our home purchase page to learn more or to get directed to a lender who could help you get pre-qualified for a home purchase loan.
As we discuss on our home purchase page, there are several government-backed home purchase programs available. Each has advantages and disadvantages. Below is a list of some pluses and minuses of each program.
– Has a 1.75% up front fee that rolls into loan – Requires monthly PMI fee for the life of the loan
– Must have military experience to be VA eligible – Charges up front fee of at least 2.25% of loan (unless borrower has disabled status)
– Only applicable in areas deemed “rural” by USDA – Requires good credit scores and history – Has upper income limits — borrowers who make too much not eligible
All of these programs are excellent overall. It’s mostly a matter of which program fits best. Contact us today at our home purchase page to learn more about which program fits best for you and to get pre-qualified for a home purchase loan.
The main categories of programs are Fannie/Freddie loans, FHA loans, VA loans, and USDA rural housing loans
In the FHA announced that it would be reducing its ongoing mortgage insurance fees for over at this website 85 basis points per year to 60 basis points per year. While not an earth-shattering change, it would have been a nice reduction in the pmi rates for new FHA borrowers. The change was scheduled to go take effect on January 28. Upon entering office, the Trump administration put a hold on all pending changes. As a result, the reduction of FHA pmi is currently, and possibly permanently on hold. Time will tell how the new administration will deal with government-backed mortgage programs over the next four years. So far, no major changes — just this one minor change in plans.