Options Available for Home Buyers with Small Down Payments
Saving up for the down payment on your first home is like a rite of passage. But the days of needing to save up thousands for a 20% down payment have passed, and there are many options for financing your new home without paying high fees or a private mortgage insurance premium (PMI).
You might be surprised to learn that loans with 10% down or less can be very affordable. “Credit scores make up for a lot of sins,” said Rick Bianco, a mortgage loan officer we work with from PNC Mortgage.
Consider these financing options:
80-10-10: Also called a “piggyback loan,” an 80-10-10 is actually two loans taken out simultaneously. One covers 80% of the mortgage, the second covers an additional 10% and the buyer only puts down 10%. This loan might allow you to avoid PMI and other fees, but it means you have to make two loan payments per month and the interest rate on the second loan may be significantly higher than the primary loan.
FHA loans: The Federal Housing Administration (FHA) allows you to put down as little as 3.5% and you can be approved with less than perfect credit. That said, FHA loans do include mortgage insurance (MI). Unlike with a conventional loan, where when a homeowner has 20% equity in their home the MI goes away, the same is not true for an FHA loan — the homeowner pays the MI through the life of the loan regardless of equity.
PNC Community: PNC Bank has a program targeted specifically toward first-time home buyers called PNC Community. While it can’t be used in Montgomery or Frederick Counties in Maryland, it allows homeowners to put down as little as 3% with no PMI. Closing cost grants are also available. The requirements are that the buyer does not own another piece of property at the time of the loan application, and either their income is less than or equal to 80% of the median income for the area they wish to purchase a home in or they are buying a home in a low- to moderate-income neighborhood. The home must be fee-simple (so no co-op housing purchases allowed with this program).
Home Possible: Backed by Freddie Mac, this program is focused on police officers, firefighters, teachers and other public employees. With just 3 percent down and no PMI, the program allows home buyers to use unsecured debt to finance a down payment. More information is available on the Home Possible from Freddie Mac website.
Doctor Loans: For new doctors, programs are also available that provide up to 90% of the purchase price and allow the down payment to be a gift from a family member or friend.
VA Loans: For current and former service members who qualify, the best deal is likely a Veterans Administration (VA) home loan. With financing of up to 100% of the purchase price and no PMI, VA loans are often the best choice for service members. More information on VA loans and the buying process is available in this article: How Buying a Home is Different for Military Service Members and Veterans.
Using a qualified, knowledgeable real estate agent and mortgage professional can make the home buying process much easier — even if you don’t have a perfect credit score or 20% down.