How To Get a Mortgage With Just 3% Down
As housing prices rise, coming up with a down payment becomes more of a financial hurdle. Consider a home that costs $400,000. (Median home prices in the U.S. currently are over $400,000.) A 10% down payment equals $40,000, a large amount of money to save. Even if you shave that down payment in half to 5%, you’d still need to save up $20,000.
Fortunately, you do have options if you are trying to save for a down payment. You might qualify for a conventional mortgage — one not insured by a government agency — that requires a down payment of just 3% of your home’s final purchase price.
That makes a difference: A 3% down payment on that $400,000 home amounts to $12,000, still a lot of money, but a sum that you can more easily reach.
3% down payment loans
You’ll have several options for a 3% down payment loan, including these:
1. Conventional 97
Fannie Mae’s Conventional 97 mortgage allows you to provide a down payment of just 3% of your home’s purchase price while financing the remaining 97%.
You will have to meet certain requirements to qualify for this loan. The most important? At least one buyer must be considered a first-time homebuyer by Fannie Mae. The definition of first-time homebuyer is loose, though. It means that you can’t have owned a home in the past three years. If you owned a home five years ago but not since? You qualify as a first-time homebuyer.
If all the homebuyers qualify as first-time buyers according to Fannie Mae’s definition, at least one buyer must complete a homebuyer education course.
2. HomeReady
Also offered by Fannie Mae, the HomeReady program also requires a down payment of just 3%. Unlike the Conventional 97, though, none of the borrowers needs to qualify as a first-time homebuyer.
There is an income limit, though: The yearly income of applicants must not be higher than 80% of the area median income in the area in which the borrowers are buying a home.
3. Home Possible
This loan program is offered through Freddie Mac and also requires a down payment of just 3%. If you are considered a first-time homebuyer, you will need to take a homeownership education program, but the program is not limited to first-time buyers.
What’s interesting about this program is that it allows co-borrowers who don’t live in the home to contribute funds to the down payment, something that might make it easier to assemble the money you need.
The disadvantages of a 3% down payment
While a 3% down payment loan makes it easier for more people to become homeowners, the loans do come with some downsides.
Whenever you put down less than 20% of your home’s purchase price, you will have to pay for private mortgage insurance (PMI), a form of insurance that protects your lender if you stop making your mortgage payments. PMI could cost you $100 or more each month.
You’ll also have less equity in your home when you provide a smaller down payment. Equity is the difference between what you owe on your mortgage and what your home is worth. If you have enough equity, you can borrow against it in the form of home equity loans. You’ll also need at least 20% equity if you want to refinance your home. And the more equity you have when you sell, the larger your profit.
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