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Don’t Have 20 Percent to Put Down?Not a Problem.

ChrisBirkBy Chris Birk

The days of scraping together a 20 percent down payment are mostly gone among today’s homebuyers, and it’s unclear if they’ll return. The average homebuyer puts down 16 percent of the purchase price, a 9.4 percent drop since May 2011, according to LendingTree. But it’s certainly possible for prospective buyers to lock into a loan with far less cash at the ready. Some housing observers have made the case that waiting to save might actually hurt consumers in the long run, as historically low interest rates start to climb. Bringing equity to the table is a sound way to start the homeownership journey. But it’s not the only one. Here’s a quick look at down payment options for the major mortgage options.

VA Home Loan

VA loans are a mortgage option specifically for service members, veterans, and the spouses of fallen soldiers. This government-backed loan program is booming, with volume up more than 370 percent since 2007. The program’s signature benefit – the ability to purchase with $0 down – is a big reason why. VA loans also feature more flexible and forgiving credit requirements and come with no form of mortgage insurance. About 9 in 10 VA borrowers purchase with no down payment. Despite that, VA loans have been the safest mortgage on the market for nearly all of the last five years. Most veterans meet the VA eligibility requirements found here, unless they have been dishonorably discharged. VA borrowers can choose to make a down payment, and doing so lowers the VA Funding Fee they may be required to pay.

USDA Home Loan

The only other $0 down mortgage option is the USDA single-family guaranteed housing loan, or Section 502 mortgage. These mortgages are funded by approved lenders and backed by the USDA, although the USDA does have a direct lending option for very low-income borrowers. To be eligible for the USDA Section 502 loan, a borrower must have modest income, not exceeding 115 percent of the area’s median income. Additionally, the home must be located in what is qualified by the USDA as a rural area, and borrowers are required to have a minimum credit score of at least 640.

A borrower won’t have to have for private mortgage insurance (PMI) or a mortgage insurance premium because USDA purchase loans come with a mandatory guarantee fee that can be financed (2 percent of the loan amount). This loan provides purchasing power for those in rural and suburban areas; however, processing a USDA loan can take up to months at a time and the USDA has a set number of dollars it lends, making the VA Loan a more viable option for those who are eligible.

FHA Loan Program

The Federal Housing Administration guaranties loans for qualified borrowers just like the Department of Veterans Affairs and USDA. FHA loans come with a 3.5 percent minimum down payment, and borrowers are required to pay an upfront mortgage insurance premium along with annual premiums. The loan limit for this option varies depending on the type and location. FHA lenders are typically looking for a credit score of at least 620, although it’s possible to have a lower score and secure financing. This loan can benefit low and middle-income borrowers who don’t qualify for zero-down payment programs, but can be costly in the long run because mortgage insurance premiums last the lifetime of the loan.

Conventional Loans

A conventional loan features no guaranties from the government and adheres to the standards and requirements of Fannie Mae and Freddie Mac. Conventional financing typically requires a down payment of least 5 percent. But if you can’t put down at least 20 percent, you’ll have to pay private mortgage insurance (PMI). In order to qualify for this loan, you’ll typically need to a credit score of 720 or better. If you feel your credit score is low and want to use a conventional mortgage, see this post from Karen Carlson, who offers some great tips for boosting your credit score. To be sure, there’s no “one size fits all” when it comes to mortgages. For example, a VA loan may not be the best fit for every military homebuyer. Carefully explore all of your options and choose a home financing program that makes sense for your financial situation and your financial future.

Chris Birk is director of content and communications for Veterans United, one of the nation’s leading financial services providers for service members and their families. He is a former journalist and author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.” Connect with Chris today on Google+.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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