What’s standing between you and your dream of owning a home? If you’re like many would-be homebuyers, the down payment may be seemingly one of the biggest hurdles that is keeping you from looking for your dream home today. The good news is you may not have to wait to save a substantial down payment in order to buy a home. There are 3% down payment mortgage options which can help qualified buyers purchase a home to ease that upfront investment.
Who is Eligible for a 3% Down Payment Mortgage?
Mortgages which offer a 3% down option allow buyers to purchase a home without having to wait to save a substantial down payment. You may be eligible for a mortgage with a low down payment option if you meet the requirements for a Conventional loan (3% down payment requirement), or FHA loan (3.5% down payment requirement). Let’s compare the two.
What are the Requirements for a 3% Down Payment Loan?
With multiple programs to choose from, the requirements for a 3% down can help many buyers qualify for a low-down payment home loan. Your Mortgage Advisor can tell you if you meet the guidelines for these loans, which may include:
- Conventional: The conventional 3% down payment loan is available for fixed rate mortgages up to 30 years.
- FHA: The 3.5% down payment option is available for fixed-rate mortgages, adjustable rate mortgages, and interest only loans.
- Conventional: One-unit residential homes eligible. Includes single-family homes, condos and planned unit developments (PUDs). Manufactured homes are not eligible.
- FHA: One-unit residential homes eligible. Includes single-family homes, condos and planned unit developments (PUDs), but not manufactured homes.
- Conventional: The home you are purchasing must be your primary residence, meaning you will live in the home and not rent it out as an investment property or use it as a vacation home.
- FHA: The home must be a primary residence, and may not be used as an investment property or vacation home.
- Conventional: Borrowers with a minimum credit score of 620 or higher may qualify.
- FHA: Borrowers with a score of 620 or higher may qualify for the 3% down payment options.
Can Gift Funds Be Used??
You have many options when it comes to the source of your 3% down payment. Some borrowers may have the funds already saved in a bank account, or retirement account such as a 401K or IRA. Both FHA and Conventional loans allow borrowers who don’t have the funds saved to use other alternatives, such as:
- Gift funds
- Grants or loans from nonprofit or government agencies
Borrowers can be gifted or given the entire amount of their down payment, and even additional funds to cover closing costs. If you are interested in receiving additional down payment assistance, ask your mortgage loan advisor what grants, loans, and other down payment assistance programs are available to you.
Do I have to be a First-Time Buyer?
While the 3% down payment mortgage is often helpful for first-time buyers, that doesn’t necessarily exclude you from qualifying if you have owned a home in the past, either.
- Conventional: One borrower must be a “first time buyer.” The definition of first time buyer in this case means you (or your co-borrower) hasn’t owned a residential property within the past 3 years.
- FHA: No requirements for first time buyer.
Will I need Mortgage Insurance?
Borrowers who take advantage of the 3% down payment option are required to carry mortgage insurance (MI):
- Conventional: MI required until you’ve reached 20% equity in your home (through appreciation or paying down principal).
- FHA: MI is required for 5 years and until you have reached 78% LTV. You can include the upfront costs of FHA mortgage insurance into your loan balance without affecting your loan-to-value calculation.
If the only thing standing between you and the dream of owning your own home is the amount of down payment you think you need to save, Ask your mortgage advisor if a 3% down payment option is right for you. With gift funds and down payment assistance available, you may already have everything you need to get pre-approved for a home loan today.