Potential homebuyers 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 past few months, those same lenders have begun filling the gap with their own low down payment loan products. Some require mortgage insurance — 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 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 homebuyer 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. And requires mortgage insurance.
Remember, mortgage insurance is 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 homebuyers, 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.
This article was written by NerdWallet and was originally published by Redfin.