REAL ESTATE TOPICS

The $100 down payment mortgage exists - but should you bite?

Don't let a big down payment keep you from buying a home. Here are four mortgage options that require as little as zero to $100 down.

By Sarita HarbourMay 9, 2014 1:07 PM

Does your dream of buying a home seem out of reach? Well, you're not alone. Many aspiring homeowners don't think it's realistic to be able to save up for a big down payment.

But don't get discouraged so easily. With some programs, you might be able to get a loan with as little as $100 down, though it usually comes at a cost.

"These programs typically come with a higher interest rate, but for the right borrower [they] are a great alternative to renting," says Anthony Van Dyke, president of ALV Mortgage in Salt Lake City, Utah.

Why the rate hike? According to Van Dyke, the rate is higher, because the potential risk for lenders is higher when borrowers put less of their own money down in a house purchase.

In addition, the lower your down payment, the higher your monthly payments will be since you are borrowing more money. And putting down less than 20 percent means that you'll have to pay mortgage insurance on top of your regular monthly payments. This insurance protects the lender in the case of a borrower defaulting on a loan.

So if you're willing to deal with those costs to fulfill your homeownership dreams, there may be a program for you. Read on for several programs requiring little or no down payment from qualified applicants.

Option #1: FHA $100-Down Program

Like the idea of putting down just one hundred bucks to buy a house? The FHA $100 Down Program may be just what you need. But is $100 really all that's required?

"The name of the program is slightly misleading," says David Bakke, money expert at the personal finance site Money Crashers.

Buyers may be responsible for some of the closing costs, which average about $2,400; the cost of a home inspection (if applicable) which ranges from approximately $400 to $500; and other items such as legal fees, which are approximately $800 to $1,000, Bakke explains.

Another caveat? Borrowers using this program are restricted to buying a HUD foreclosure.

"A HUD home is a 1-to-4 unit residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage," says the HUD website. HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim." Additionally, the borrower must purchase the home through the regional HUD office, which must be offering the $100 down only incentive.

Additionally, buyers may pay more than the home is worth if there is a bidding war for the home, says Bakke. If the bidding price exceeds the home's value, the buyer will have to come up with the difference between the sale price and HUD's appraised value on their own, he says. Bakke adds that the FHA arranges for an appraisal, so homebuyers don't need to get one on their own.

"So if the [HUD] appraised value of the property is $100,000, but the winning bid is $115,000, then the buyer must bring the $100 plus the $15,000," Bakke explains.

Option #2: FHA Down Payment Assistance Programs

Buying a home with 20 percent down may not seem realistic. But what if you could knock that number way down?

Well, with a Federal Housing Administration (FHA) loan, your down payment can be as little as 3.5 percent of the purchase price of a house, according to the U.S. Department of Housing and Urban Development (HUD) website.  

If that's still out of your budget, then you may be able to go even lower with an FHA down payment assistance program. How exactly is that possible?

"FHA allows government entities and non-profit organizations to issue second mortgages to cover the required 3.5 percent down payment," says Van Dyke. How? Well, these programs offer qualified applicants loans or grants for their down payment - the latter being an even better option since that's money that doesn't need to be paid back.

This essentially means that you could secure a mortgage with zero down through a down payment assistance program - a boon for cash-strapped homebuyers.

But usually, the borrower must pay the money back by making payments on a low-interest rate loan. In some FHA down payment assistance programs, the debt can be forgiven if the borrower lives in the home for the period of time specified in the agreement, says Phil Georgiades, chief loan steward of the VA Home Loan Centers, an organization helping veterans purchase homes.

Georgiades explains that there are different types of down payment assistance programs - some are geared toward police officers, teachers, veterans or firefighters. Other assistance programs are designed for homeowners who earn less than the median income of the area where the home is located.

The [down payment assistance] funds can be used with any loan type, including FHA, VA, USDA, or conventional, he says.

However, as Georgiades points out, there are some limitations to these FHA down payment assistance programs.

"Unlike normal FHA [loan] rules, non-occupant borrowers (co-signers) are not allowed," he says. Additionally, there is a limit to the purchase amount of the home with down payment assistance, and the borrower must usually have at least a 640 FICO credit score to apply. Finally, even if they don't have the cash, borrowers must show they own something of value in $1,500 in assets, Georgiades says.

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Option #3: Zero-Down VA Home Loan Program

The FHA isn't the only government agency offering low down payment loans for homebuyers. The U.S. Department of Veteran Affairs has a VA loan for military members.

"VA Loans are made for veterans, active duty military, and the surviving spouses of military members that have died as a result of service," says Georgiades. VA loans are different from other low down payment programs, because they have lower interest rates than conventional mortgages, and are very easy to qualify for, he says.

"Unlike conventional mortgages, they do not require excellent credit and allow for higher debt-to- income ratios," says Georgiades. A debt-to-income ratio (DTI) compares an individual's debt payments to his or her income and measures how likely it is that a borrower will repay a loan.

Under recent regulations under the 2014 Dodd-Frank Act, the recommended DTI is 43 percent when approving mortgages. But some lenders who offer VA loans allow a borrower to have a DTI as high as 70 percent, says Georgiades.

"We know of lenders that will also allow borrowers to get a VA loan with a FICO score as low as 530 with extenuating circumstances," Georgiades says. "Other lenders will originate FHA loans with a FICO as low as 600."

Another perk of the VA loans? No mortgage insurance required, says Georgiades, though there is an additional fee.

"Unless the borrowers receive disability income from the VA, they will have to pay a funding fee, but this can be included in the mortgage amount," he says.

The funding fee ranges from 2.15 to 2.4 percent of the loan for first-time homebuyers and 3.3 percent for subsequent home purchases, according to the Department of Veterans Affairs. Charging this fee to homebuyers reduces the loan's cost to taxpayers, especially considering that a VA loan doesn't require a down payment or mortgage insurance.

While this all may sound ideal, be aware that there are some drawbacks to this program, according to Georgiades.

"Most [real estate] agents do not understand the program and are shy to accept an offer that has VA financing," he says. In addition, only veterans or active-duty military and their spouses can apply for the loan, and VA loans cannot be used to purchase an income property. 

Option #4: USDA Home Loan

If you're not much of a city slicker and instead dream of a home in a rural area, a USDA loan may be a good option for you. Why? Well, for starters it doesn't require any money down, says Bakke.

Under this program, officially known as the USDA Rural Development Single Family Housing Guaranteed Loan, the closing costs can be financed as well, notes Bakke.

As part of the Community Reinvestment Act, he explains, banks and other financial institutions may provide special financing within certain zip codes.

"The Community Reinvestment Act is a federal law, part of the Housing and Community Development Act of 1977," says Bakke. "Banks are willing to provide special financing because of it, because they are regulated and audited by the government from time to time for compliance."

 Bakke says these loans are typically in low to moderate income neighbourhoods, and they may cover all of the costs of getting the loan. "Some of those programs allow for 100 percent financing as well," he adds.

So how do you qualify? The main factor is income. According to Georgiades, applicants must be US citizens who may earn up to 115 percent of the median income of the area in which they're applying, and the area of the home is key.

 "USDA Loans are only for rural use so the area where the home is located must have a population of 10,000 or less," says Georgiades.