Potential home buyers who can't quite pony up the traditional 20% down payment have often had FHA loans as an alternative. But some lenders are shying away from these loans for legal and regulatory reasons.
Over the last few months, those same lenders have begun filling the gap with their own low-down-payment loan products. Some require mortgage insurance, similar to FHA loans. The premiums you pay protect the lender in case you default.
Here's what you need to know about the low-down-payment programs from major lenders.
3 is the new 20
It seems that 3% down is the new magic number for most lenders. That's because Fannie Mae and Freddie Mac, the government-sponsored enterprises that provide capital to the mortgage market, will buy loans with 97% financing.
Wells Fargo's yourFirst Mortgage offers fixed-rate mortgages with as little as 3% down, allows borrowers to use down-payment-assistance programs and offers incentives to participate in home buyer education.
The program's loans are available to low- and moderate-income individuals with FICO scores of 620 or better. Wells Fargo evaluates credit using nontraditional sources, such as tuition, rent or utility bill payments. It also considers the income of others who will live in the home, such as family members or renters. The mortgages do require mortgage insurance.
JPMorgan Chase has a similar program called Standard Agency 97%. It doesn't have a snappy name, but it too allows customers to put just 3% down if they have FICO scores of 680 or better. Borrowers must carry mortgage insurance.
How low can you go?
Quicken Loan's 1% Down program beats them all in the race to the bottom. The lender actually gives consumers 2% grants to make up the difference.
"This product was designed to remove one of the most common barriers in the way of potential home buyers — a large down payment," says Bill Banfield, vice president of capital markets at Quicken Loans. "First-time buyers and minorities are two groups commonly affected by these requirements, but a 1% down program can help many groups."
Borrowers must have a 680 FICO score or better, earn less than the median income for their county and carry a debt-to-income ratio of 45% or less.
As appealing as these programs may be, they all require mortgage insurance. And remember, that's something you pay for even though it protects the lender. But users of these programs don't have to pay mortgage insurance premiums upfront, and they can cancel the policies once their home values reach a certain equity target, unlike FHA loan recipients.
However, we did find two loan programs that remove that pay-to-play provision.
Low down payments and no mortgage insurance
Bank of America's Affordable Loan Solution is one. It's a fixed-rate mortgage program for low- and moderate-income home buyers, allowing down payments as low as 3%. You must have a FICO credit score of 660 or higher, and maximum income and loan amount limits apply, which vary by location.
And Citibank's HomeRun mortgage permits as little as 3% down and offers up to $5,000 in assistance with closing costs. There's also an "on-time closing guarantee." Income and loan limits apply by location.
As usual, there are no free rides. Lenders that don't require mortgage insurance almost certainly charge higher mortgage interest rates. So it always pays to shop around.
Making a down payment of less than 20% on a home is a complicated financial decision, but if it's something you're considering, you have options.