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Conventional Low Down Payment Options for Purchase or Refinance

Get the Low-Down

Few people know that Conventional financing will allow less than a 20% down payment.

I am shocked at how many folks I speak to every day that think that a conventional loan is not an option for buying a home with a low down payment.

In this article I will cover several options for using conventional financing, some of which require a lower down payment than a FHA loan, which requires only 3.5% down payment.

Both Fannie Mae and Freddie Mac have special loan programs available that, based on your income, and/or the geographic region you are buying in, allow you to buy with as little as 3% down payment.

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Better Credit is Best

The one “catch”, if there is one, is that conventional loan programs favor better credit scores in all cases.

If you’re one of those homebuyers, or homeowners that has excellent credit, but not a lot of equity or money for a down payment, you may be surprised at conventional loan options offer.

Fannie Mae HomeReady

Fannie Mae’s HomeReady program is designed to meet he diverse needs of today’s buyers using flexible underwriting guidelines for creditworthy low-to-moderate income borrowers trying to finance a home in low-to-moderate income communities.

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HomeReady Features

  • Income from non-borrowing household members can be considered as a compensating factor to allow debt to income ratio greater than 45%, up to 50%.
  • Can use income from rental unit and boarder income for qualifying.
  • Allows non-occupying borrowers, like a parent, to help meet debt to income requirements.
  • Financing up to 97% loan to value for the purchase of a one-unit principal residence.
  • Financing up to 95% loan to value for limited cash out refinances, or 97% loan to value if mortgage being refinanced is owned or guaranteed by Fannie Mae.
  • You are NOT required to be a first time home buyer to qualify for this program
  • Private mortgage insurance is discounted, and can be cancelled once you pay principal balance down to below 80% loan to value (FHA mortgage insurance cannot be cancelled at any time).
  • Gifts, grants, community seconds, and cash-on-hand can be used as a source of funds for down payment and closing costs.
  • Nontraditional credit is allowed.  An example is rental history, or utility and insurance payments.

Qualifying Requirements for HomeReady

Borrowers using HomeReady are required to meet certain criteria that are not necessarily required if you’re using a traditional conventional loan with a maximum loan to value of 95% (5% down payment for purchase).

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Homeownership Education Requirement – A homeownership education course may be required unless you have previously taken a course required by a community seconds program, or if you’ve completed a course from a recent attempt to purchase another home.

Income Eligibility – HomeReady is available to any homebuyer or homeowner that meets the income limits of the property location.  The income limits may be waived if the property is located in a “targeted” low-to-moderate income Census Tract.

You can look up the income and property eligibility by entering the address of the home you’re interested in into Fannie Mae’s Eligibility Search Tool Here

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Freddie Mac Home Possible Mortgages

Freddie Mac’s Home Possible mortgage offer low down payments for low-to-moderate income homebuyers, or buyers in high-cost or underserved communities.

Freddie Mac offers two different low downpayment options, Home Possible 95% Loan to Value, and Home Possible Advantage 97% Loan to Value.

Home Possible 95% Features

  • Maximum loan to value 95%.  Minimum 5% down payment for purchase.
  • Property options – 1 to 4 units, condos, and planned urban developments are eligible with certain restrictions.
  • Flexible sources of down payment.  Down payment can come from a variety of sources, including friends and family, employer-assistance programs and secondary financing.
  • Loan program flexibility. 15 to 30 year fixed rate mortgages, 5/1, 7/1 and 10/1 adjustable rate mortgages are allowed.
  • No cash-out refinancing is available up to 95% loan to value for borrowers who occupy the property.
  • Income flexibility.  Borrowers with income above the area median income (AMI) may be eligible in high-cost areas.  Not income limits in underserved areas.
  • You can check eligibility by using Freddie Mac’s Home Possible Income & Property Eligibility Tool Here.
  • Private mortgage insurance is discounted, and can be cancelled once you pay principal balance down to below 80% loan to value (FHA mortgage insurance cannot be cancelled at any time).

Home Possible 97% Features

  • Maximum loan to value 97%.  Minimum 3% down payment for purchase.
  • 1-unit single family unit homes, condominiums, and planned unit developments are eligible.
  • Flexible sources of down payment.  Down payment can come from a variety of sources, including friends and family, employer-assistance programs and secondary financing.
  • 30 year fixed rate mortgages provide stable mortgage payments.
  • No cash-out refinancing is available up to 97% loan to value for borrowers who occupy the property.
  • Income flexibility.  Borrowers with income above the area median income (AMI) may be eligible in high-cost areas.  Not income limits in underserved areas.
  • You can check eligibility by using Freddie Mac’s Home Possible Income & Property Eligibility Tool Here.
  • Private mortgage insurance is discounted, and can be cancelled once you pay principal balance down to below 80% loan to value (FHA mortgage insurance cannot be cancelled at any time).
  • All borrowers must live in the property.  Non-occupying borrowers not allowed at 97% loan to value.

How Do I Choose The Best Option?

There is very little to no difference between the costs and interest rates of these programs, so it comes down to your financial situation that may determine which option is best for you.  In a sense, the best option chooses you.

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A common example is if you have student loans with Income Based Repayment (IBR) payments, Freddie Mac offers the only option that allows you to use the income based payment when qualifying.

Fannie mae underwriting guidelines are going to require that your student loan payments be amortized to pay off at the end of a fixed loan term.

Another example is that the targeted income and property lookup tools offer different results.  If you look up a property using Fannie Mae’s HomeReady lookup tool, you may make too much income to qualify, whereas if you look up the same property using Freddie Mac’s Home Possible lookup tool, you may qualify.

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Maximum income limits also vary between Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs.  Fannie Mae will limit your income to between 80% and 100% of the area median income.

Freddie Mac Home Possible allows up to 140% of the area median income to be used for qualifying in high-cost, underserved areas such as is common in the State of California.

 

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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