There are quite a few options for owner occupants looking to buy a property with little money down. FHA loans are government insured loans and have been a great choice for owner occupants for many years. FHA loans have as little as a 3.5 percent down payment. Conventional loans are not backed by the government, but they also have low down payment options. In fact, conventional loans have 3 percent down payment options and they have other advantages as well like lower mortgage insurance.
What are the advantages of a FHA mortgage?
FHA loans are federally insured and because of that, they have low down payments and can be a great option for home buyers. FHA loans do have some advantages over other loans. FHA loans can be obtained by borrowers with a credit score as low as 580. Borrowers can also have up to a 52 percent debt to income ratio with FHA loans. As I mentioned earlier, FHA loans also have 3.5 percent down payment. FHA is a great option for people with low credit, scores and little money. Remember just because the lender says you can qualify for a home, that does not make it a wise financial decision.
One downside to a low money down loan is you will almost always have mortgage insurance. Mortgage insurance is charged on FHA loans when you first buy a home and every month as well. The cost for mortgage insurance on a FHA loan is 1.75 percent of the loan amount upfront and between .8 and 1.05 percent of the loan every year. The mortgage insurance can never be removed on a FHA loan.
What are the advantages of a low down payment conventional loan?
Conventional mortgages for owner occupied buyers have as low as a 3 percent down payment. The great thing about some conventional mortgages is the mortgage insurance is lower and can be removed after a few years in some cases. Conventional mortgages have higher requirements for credit scores and debt to income ratios. With many conventional mortgages the borrower cannot have higher than a 45 percent debt to income ratio or lower than a 620 credit score.
While it is tougher to get a conventional mortgage, the costs are usually less and the mortgage insurance can be removed. If you have the loan for three years and the loan amount becomes less than 80 percent of the value of the home, many conventional loans will allow the mortgage insurance to be removed. The cost for mortgage insurance on conventional loans ranges from .5 to 1 percent of the loan amount and there is usually no upfront mortgage insurance.
What if a home needs repairs that will not allow it to qualify for a typical loan?
In some cases a home may need repairs that will not allow it to qualify for financing. FHA and conventional loans for owner occupied buyers will both have requirements that a home be in livable condition to get the loan. If a home needs a new roof, the plumbing won’t work or there are holes in the walls it may not qualify for FHA or conventional. If you are buying a HUD home, short sale or a REO property there is a good chance the seller will not fix these items.
If you want to get a really good deal on a home, it may need work and that makes it tough for owner occupants to buy. However there are ways that owner occupants can get loans on houses that need a lot of work.
- FHA 203K loan: FHA offers a 203k loan, which allows the buyer to make repairs after the closing. This allows buyers to purchase a home that is in complete disrepair with a FHA loan. 203k loans are much more expensive than a regular FHA loan.
- Conventional loan with repair escrow: Some conventional loans may allow you to escrow for repairs that are to be made after closing. The Fannie Mae Homestyle Renovation loan also allows a borrower to make repairs after closing and can even be used by investors.
When you are buying a home that needs work make sure you talk to your lender and agent about the work needed and if the loan you are thinking about will work. On HUD homes you may not be able to turn the water on for appraisals, but many conventional loans will require the utilities to be working. However, if you get a FHA loan on HUD homes you will not have to have the water on, because HUD has a special program for FHA.
There are many options for home owners looking to buy with little money down. FHA mortgages used to be the number one option, but conventional mortgages are providing a viable option. How much work a home needs, your credit score, debt to income ratios and other factors will determine what loan is best for you. Make sure you talk to your lender about all options and ask about down payment assistance programs as well. Colorado has multiple down payment assistance programs that allow owner occupants to put even less than 3 percent down.