However, home loan products and homebuyer assistance programs are available from lenders, local governments and nonprofit groups eager to help renters move into homeownership.
“There are two roadblocks that most would-be buyers think they face,” says Malcolm Hollensteiner, director of retail lending for TD Bank in McLean. “The first obstacle is down payment accumulation.
The second is purely psychological: the fear that they cannot qualify for a loan…There are fantastic opportunities that people are not aware of to reduce your need for cash and to obtain a loan approval.”
Lenders have special programs for new buyers with little cash and for those with low-to-moderate income or credit challenges.
“Prospective first-time buyers often think the loan process is too hard and that the closing costs are too substantial,” says Ray Brousseau, executive vice president of Carrington Mortgage Services in Santa Ana, Calif. “They don’t realize that there are programs for them that allow for a limited down payment and eliminate other out-of-pocket expenses, including closing costs.”
In a recent poll by NeighborWorks, a network of community development organizations that provides homeownership assistance, 70 percent of those surveyed did not know about the existence of down payment assistance programs for first-time buyers.
Contacting a lender, a local government housing office or a nonprofit, HUD-approved housing counselor can start your journey to homeownership even if you believe you are years away from it.
“Buyers think about choosing a home and choosing a neighborhood, but they don’t think about a mortgage as a ‘product,’ ” says Marietta Rodriguez, vice president of national homeownership programs for NeighborWorks in Washington. “The truth is they need to shop for the right financing as much as for the right home.”
Loan Program Eligibility…
A lender or housing counselor can discuss your individual financial circumstances. But if you’re considering a home purchase, you should understand the basic differences between available mortgages.
Conventional loans: These loans, which are guaranteed by government-sponsored enterprises Fannie Mae and Freddie Mac, have down payment requirements as low as 3 percent for first-time buyers.
Traditionally, these loans require a down payment of 5, 10 or 20 percent. Borrowers need to pay private mortgage insurance (PMI) unless they make a down payment of 20 percent or more. Typically these loans have stricter standards for credit scores, often required to be above 660, and for debt-to-income ratios, which must be 43 percent or lower.
FHA loans: These products, insured by the Federal Housing Administration, require a down payment of 3.5 percent and both upfront and annual mortgage insurance. Recently, the annual mortgage insurance premiums for these loans were reduced to 0.85 percent of the loan amount from 1.35 percent, making them more affordable for borrowers than in the past. Credit standards for these loans are typically looser, with most lenders requiring a score of 620 or 640.
“If all of your down payment funds are a gift, then an FHA loan is your best choice. Because for a conventional loan, you need to have your own money for at least some of the down payment,” says Hollensteiner.
VA loans: Veterans Affairs loans have no down payment or mortgage insurance requirement but are limited to eligible members of the military, veterans, spouses and some defense-related employees.
USDA loans: Agriculture Department loans are limited by income and property location, primarily in rural areas, and have no down payment requirement, but they do require mortgage insurance.
Individual lenders, banks and credit unions also offer mortgage products within the guidelines established by their own leadership, the government or investors.
Portfolio loans: Unlike most other conventional loans, this mortgage product is kept on the lenders’ books rather than sold to investors. A lender may establish its own criteria for a loan approval.
TD Bank’s “Right Step” loan product, designed for first-time buyers but also available to borrowers who have previously owned a home, requires a down payment of 3 percent. Unlike other conventional loan products with low down payments, this mortgage does not require PMI. Hollensteiner says the interest rate on these fixed-rate loans are typically slightly below average mortgage rates. The Right Step loans are kept in TD Bank’s portfolio and are not sold to investors.
“There are two ways to be eligible for these loans: either through income eligibility, which means your income must be at or below 80 percent of the area median income ($82,984 for a four-person household in the D.C. region in 2015), or you are buying a home in a census tract identified as low-to-moderate income,” Hollensteiner says.
In addition, the Right Step program has the following requirements:
•A credit score of 660 or higher.
•An overall debt-to-income ratio of 38 percent, meaning that the minimum amount you pay on your mortgage and other debts every month cannot exceed 38 percent of your monthly gross income.
•Down payment funds must come from the borrower, not from a gift.
•Closing costs can be paid by the sellers.
Borrowers who can qualify for a loan but lack cash may be particularly interested in homebuyer programs. One place to search by location for downpayment assistance programs is downpaymentresource.com.
Homebuyer Programs…
Many D.C.-area residents assume they make too much money to qualify for a homebuyer assistance program. But Rodriguez says that these programs typically are available to buyers who make up to as much as 120 percent of the area median income ($131,040 for a four-person household in the D.C. region in 2015).
“People self-select themselves out of financial assistance because they think a ‘social service’ agency isn’t for someone like them,” Rodriguez says. “Realistically, everyone can benefit from homebuyer education even if they aren’t eligible for financial aid.”
Rodriguez says it is best for consumers to take a homebuyer education class the moment they think they want to buy a home.
“If you wait until after you’ve applied for a loan and selected a home to take a class, you’ve already made two of the biggest decisions associated with becoming a homeowner,” says Rodriguez. “People think of these classes as social services, but very well-educated, high-income people don’t always understand the nuances of loan programs. Buying a home is complex, and it’s worth it to be educated.”
NeighborWorks partners in the D.C. region are Manna Inc. in the District and AHC Inc. in Arlington. Maryland residents can find homebuyer education classes and information about down payment assistance programs through the state government’s Maryland Mortgage Program. Virginia residents can take homebuyer education classes and find out if they are eligible for down payment assistance through the Virginia Housing Development Authority (VHDA).
“Most down payment assistance programs are limited to first-time homebuyers, but it’s important to realize that we go by the federal government’s definition of a first-time buyer, which is someone who has not owned a home within the past three years,” says Michele Watson, director of homeownership programs for the Virginia Housing Development Authority in Richmond. “It’s great for active-duty military personnel, in particular, who have been transferred from one station to another and owned a home in the past but want to buy in this area now.”
Mortgage Loan Glossary…
•Debt-to-income ratio: This ratio compares the minimum payment on your bills including your housing payments, car payments, student loans and credit card debt to your gross monthly income. Typically, lenders will allow a maximum ratio of 43 percent — meaning that your monthly debts cannot exceed 43 percent of your monthly gross income.
•Private mortgage insurance (PMI): Borrowers who make a down payment of less than 20 percent on a conventional loan must pay PMI until the loan-to-value reaches 80 percent or less. This insurance is required to protect the lender if you default on the loan.
•Lender-paid mortgage insurance: Some lenders pay the PMI upfront and then charge the borrowers a slightly higher interest rate as repayment.
•FHA mortgage insurance: FHA loans require both a single upfront mortgage insurance premium that can be wrapped into the loan and an annual mortgage insurance premium that is paid in 12 monthly installments with the borrowers’ mortgage payment. This mortgage insurance must be paid for the life of the loan.
•Portfolio loan: This is a loan kept on the lenders’ books rather than sold to investors. A lender may establish its own criteria for a loan approval.
VHDA’s “FHA Plus” program provides down payment assistance in the form of a second 30-year fixed-rate mortgage at a low interest rate so that the additional payment can be as low as $20 per month, Watson says. To qualify, borrowers need a credit score of 620 to 660 or above for 3.5 percent in down payment assistance and a score of 661 or above to qualify for up to 5 percent of the home value.
“We also offer a Fannie Mae loan program for borrowers with higher credit scores of at least 660 to 700,” Watson says. “With that program, the buyers make a down payment of 3 percent, but we take on the risk so they don’t have to pay PMI. However, the interest rate is slightly higher than average Fannie Mae rates.”
Borrowers are required to take a homebuyer education class to qualify for all VHDA loan programs.
“We adjust our income limits for participation in our loan programs by county, so even though Northern Virginia has higher housing costs and higher incomes than the rest of the state, 28 percent of VHDA loans are borrowed by people from this region,” Watson says.
Rodriguez says one of the benefits of homebuyer education is to help people plan for future homeownership even if they aren’t immediately ready.
“People say they can’t afford to buy a home, but it’s important to know the tradeoffs they can make, such as owning a less expensive car or working to improve their credit,” Rodriguez says. “You can find out how far away you are from being ready to buy and learn how to make improvements so you’re ready sooner. Housing counselors can work with people for years to help them with their finances.”
Loans for credit-challenged borrowers
At Carrington Mortgage Services, Brousseau says their focus is on underserved borrowers who have a credit score below 650.
“We do common-sense underwriting, our borrowers have to demonstrate that they can make the payments and they have to explain the story of why they have a low credit score,” Brousseau says. “Our borrowers have to meet FHA loan guidelines, and we have to understand their finances so we can be confident that whatever caused their credit score to be lower won’t happen again.”
Brousseau says Carrington requires borrowers to complete an online course to prove that they completely understand their loan.
“We’re also offering the ‘Carrington Loan’ model for FHA and VA loans so borrowers can elect to bake all the closing costs and escrow deposits into their loan and get into a home with minimal cash,” Brousseau says.
Carrington partners with some down payment assistance programs as well, as long as they allow the lender to keep the loan in their portfolio.
“First-time buyers and people who are ready to buy again after a financial crisis should understand that there are lots of options available,” Rodriguez says. “Everyone should shop around and make sure they choose the mortgage product that’s right for them. Sitting down with a housing counselor for an hour to educate yourself can help everyone make a better choice.”
Credit Scores And Mortgage Loans…
If your score is below 620 to 640: An FHA (Federal Housing Administration) home loan is your best option because most lenders won’t approve a conventional loan for borrowers with a credit score below 640. In addition, your interest rate would be much higher on a conventional loan even if you are approved.
If your score is between 640 and 740: You should compare your options for both FHA and conventional loans because while you can likely qualify for both, your interest rate will be higher for a conventional loan. However, your mortgage insurance is likely to be higher with an FHA loan.
If your score is above 740: Your best bet is likely to be a conventional loan because your credit score qualifies you for the lowest interest rates. Conventional loans are available now with a down payment as little as 3 percent.
“If all of your down payment funds are a gift, then an FHA loan is your best choice. Because for a conventional loan, you need to have your own money for at least some of the down payment,” says Hollensteiner.
VA loans: Veterans Affairs loans have no down payment or mortgage insurance requirement but are limited to eligible members of the military, veterans, spouses and some defense-related employees.
USDA loans: Agriculture Department loans are limited by income and property location, primarily in rural areas, and have no down payment requirement, but they do require mortgage insurance.
Individual lenders, banks and credit unions also offer mortgage products within the guidelines established by their own leadership, the government or investors.
Portfolio loans: Unlike most other conventional loans, this mortgage product is kept on the lenders’ books rather than sold to investors. A lender may establish its own criteria for a loan approval.
TD Bank’s “Right Step” loan product, designed for first-time buyers but also available to borrowers who have previously owned a home, requires a down payment of 3 percent. Unlike other conventional loan products with low down payments, this mortgage does not require PMI. Hollensteiner says the interest rate on these fixed-rate loans are typically slightly below average mortgage rates. The Right Step loans are kept in TD Bank’s portfolio and are not sold to investors.
“There are two ways to be eligible for these loans: either through income eligibility, which means your income must be at or below 80 percent of the area median income ($82,984 for a four-person household in the D.C. region in 2015), or you are buying a home in a census tract identified as low-to-moderate income,” Hollensteiner says.
In addition, the Right Step program has the following requirements:
•A credit score of 660 or higher.
•An overall debt-to-income ratio of 38 percent, meaning that the minimum amount you pay on your mortgage and other debts every month cannot exceed 38 percent of your monthly gross income.
•Down payment funds must come from the borrower, not from a gift.
•Closing costs can be paid by the sellers.
Borrowers who can qualify for a loan but lack cash may be particularly interested in homebuyer programs. One place to search by location for downpayment assistance programs is downpaymentresource.com.
Homebuyer Programs…
Many D.C.-area residents assume they make too much money to qualify for a homebuyer assistance program. But Rodriguez says that these programs typically are available to buyers who make up to as much as 120 percent of the area median income ($131,040 for a four-person household in the D.C. region in 2015).
“People self-select themselves out of financial assistance because they think a ‘social service’ agency isn’t for someone like them,” Rodriguez says. “Realistically, everyone can benefit from homebuyer education even if they aren’t eligible for financial aid.”
Rodriguez says it is best for consumers to take a homebuyer education class the moment they think they want to buy a home.
“If you wait until after you’ve applied for a loan and selected a home to take a class, you’ve already made two of the biggest decisions associated with becoming a homeowner,” says Rodriguez. “People think of these classes as social services, but very well-educated, high-income people don’t always understand the nuances of loan programs.
Buying a home is complex, and it’s worth it to be educated.” NeighborWorks partners in the D.C. region are Manna Inc. in the District and AHC Inc. in Arlington. Maryland residents can find homebuyer education classes and information about down payment assistance programs through the state government’s Maryland Mortgage Program. Virginia residents can take homebuyer education classes and find out if they are eligible for down payment assistance through the Virginia Housing Development Authority (VHDA).
“Most down payment assistance programs are limited to first-time homebuyers, but it’s important to realize that we go by the federal government’s definition of a first-time buyer, which is someone who has not owned a home within the past three years,” says Michele Watson, director of homeownership programs for the Virginia Housing Development Authority in Richmond. “It’s great for active-duty military personnel, in particular, who have been transferred from one station to another and owned a home in the past but want to buy in this area now.”
VHDA’s “FHA Plus” program provides down payment assistance in the form of a second 30-year fixed-rate mortgage at a low interest rate so that the additional payment can be as low as $20 per month, Watson says. To qualify, borrowers need a credit score of 620 to 660 or above for 3.5 percent in down payment assistance and a score of 661 or above to qualify for up to 5 percent of the home value.
“We also offer a Fannie Mae loan program for borrowers with higher credit scores of at least 660 to 700,” Watson says. “With that program, the buyers make a down payment of 3 percent, but we take on the risk so they don’t have to pay PMI. However, the interest rate is slightly higher than average Fannie Mae rates.”
Borrowers are required to take a homebuyer education class to qualify for all VHDA loan programs.
“We adjust our income limits for participation in our loan programs by county, so even though Northern Virginia has higher housing costs and higher incomes than the rest of the state, 28 percent of VHDA loans are borrowed by people from this region,” Watson says.
Rodriguez says one of the benefits of homebuyer education is to help people plan for future homeownership even if they aren’t immediately ready.
“People say they can’t afford to buy a home, but it’s important to know the tradeoffs they can make, such as owning a less expensive car or working to improve their credit,” Rodriguez says. “You can find out how far away you are from being ready to buy and learn how to make improvements so you’re ready sooner. Housing counselors can work with people for years to help them with their finances.”
Credit Qualifications…
Your credit score is a big factor in determining which loan program works best for you.
“If you have a credit score below 700, then an FHA loan is more likely to make sense because FHA loan guidelines don’t require a higher interest rate based on your score,” Busch says. Also, he says, FHA mortgage rates tend to be about one-quarter percentage point lower than conventional rates.
FHA loans can be approved on a case-by-case basis for borrowers with a credit score as low as 580 without any interest-rate penalty.
Conventional loan guidelines require an add-on to the interest rate for borrowers with a credit score below 740. Busch says conventional loans can be approved for borrowers with a credit score as low as 620, but the increase in the interest rate would be significant. In addition, he says, you would need to make a down payment of 20 percent because PMI companies require a higher credit score to qualify for mortgage insurance.
Depending on the borrower’s credit score, Busch says, the interest rate on a conventional loan could be higher by one-quarter percentage point or more.
Loans For Credit-Challenged Borrowers…
At Carrington Mortgage Services, Brousseau says their focus is on underserved borrowers who have a credit score below 650.
“We do common-sense underwriting, our borrowers have to demonstrate that they can make the payments and they have to explain the story of why they have a low credit score,” Brousseau says. “Our borrowers have to meet FHA loan guidelines, and we have to understand their finances so we can be confident that whatever caused their credit score to be lower won’t happen again.”
Brousseau says Carrington requires borrowers to complete an online course to prove that they completely understand their loan.
“We’re also offering the ‘Carrington Loan’ model for FHA and VA loans so borrowers can elect to bake all the closing costs and escrow deposits into their loan and get into a home with minimal cash,” Brousseau says.
Carrington partners with some down payment assistance programs as well, as long as they allow the lender to keep the loan in their portfolio.
“First-time buyers and people who are ready to buy again after a financial crisis should understand that there are lots of options available,” Rodriguez says. “Everyone should shop around and make sure they choose the mortgage product that’s right for them. Sitting down with a housing counselor for an hour to educate yourself can help everyone make a better choice.”
Credit Scores And Mortgage Loans…
If your score is below 620 to 640: An FHA (Federal Housing Administration) home loan is your best option because most lenders won’t approve a conventional loan for borrowers with a credit score below 640. In addition, your interest rate would be much higher on a conventional loan even if you are approved.
If your score is between 640 and 740: You should compare your options for both FHA and conventional loans because while you can likely qualify for both, your interest rate will be higher for a conventional loan. However, your mortgage insurance is likely to be higher with an FHA loan.
If your score is above 740: Your best bet is likely to be a conventional loan because your credit score qualifies you for the lowest interest rates. Conventional loans are available now with a down payment as little as 3 percent.
Mortgage Loan Glossary:
•Debt-to-income ratio: This ratio compares the minimum payment on your bills including your housing payments, car payments, student loans and credit card debt to your gross monthly income. Typically, lenders will allow a maximum ratio of 43 percent — meaning that your monthly debts cannot exceed 43 percent of your monthly gross income.
•Private mortgage insurance (PMI): Borrowers who make a down payment of less than 20 percent on a conventional loan must pay PMI until the loan-to-value reaches 80 percent or less. This insurance is required to protect the lender if you default on the loan.
•Lender-paid mortgage insurance: Some lenders pay the PMI upfront and then charge the borrowers a slightly higher interest rate as repayment.
•FHA mortgage insurance: FHA loans require both a single upfront mortgage insurance premium that can be wrapped into the loan and an annual mortgage insurance premium that is paid in 12 monthly installments with the borrowers’ mortgage payment. This mortgage insurance must be paid for the life of the loan.
•Portfolio loan: This is a loan kept on the lenders’ books rather than sold to investors. A lender may establish its own criteria for a loan approval.