One of the biggest barriers to buying a home for many Americans is the down payment. But many first-time home buyers have misconceptions about the down payment that is required, as well as what credit scores are needed. According to the National Association of Realtors, 85% of first time buyers think they need 10% down to buy a home. Not to mention, many new house buyers do not realize that there are several solid options to qualify for a home loan with average-credit scores.
This is not the case in many situations, even with those with average credit. In fact, the typical down payment in 2018 for a first-time buyer is only 6%, and you may be able to get into your first home with little down payment or even none in a few cases. Keep reading to learn more about first-time home buyers credit rules and how you can buy a home with little cash down and average credit.
Should You Get a Home with Low Down Payment?
The loans available to you vary depending upon the down payment you want or need to make. While many people want to put as little down as they can, there are some benefits to putting more cash down. You will have a smaller loan balance and a lower payment. You also will often avoid mortgage insurance and have more loan options.
But there are also down sides to having a bigger down payment. You are putting down more of your available cash; you might not get a better rate even with a larger down payment; and you do not have as much money for emergencies.
Low Down Payment Options for Average Credit
From zero down mortgages to 10% down, there are many good loan options for people who want to put little down and don’t have the best credit. For most first-time programs, the credit-score will have some influence on the down-payment requirement.
FHA Financing and Credit
The most common is the FHA-insured home loan. It is popular because you can only put 3.5% down and you do not need to have great credit to qualify. The minimum credit score for a 3.5% down payment is 580. Statistics show that most people with at least a 620-credit score may qualify for an FHA loan with average-credit and may be able to put only 3.5% down. But if you are worried about coming up with that 3.5%, keep in mind that you can get all of your down payment as a gift. It is common for FHA home buyers to get their down payment from family.
One of the realities of the FHA option is you must pay for mortgage insurance, which is 1.75% up front and .85% or so of the loan balance each year that is paid as part of the mortgage payment. On a $200,000 loan, you are looking at $3,500 up front (that can be rolled into the loan) and $140 per month.
With new FHA rules, you generally cannot cancel FHA insurance even if you put down 20%. Even if you get more than 20% equity in the home, if you only put down 3.5%, you cannot cancel mortgage insurance. Your only option is to refinance into a conventional loan.
Regarding credit scores, you can have fairly poor to average credit and still qualify if you are paying your bills on time. Lenders are able to offer you very low rates that may be lower than conventional interest rates. This program is good for the first-time buyer with average credit and not a lot to put down.
VA Financing and Credit
The next good option is the VA loan, which is only available to military veterans and active military. This is one of the few zero down home loans available today. You can get 100% financing and you do not need good credit.
You do have to pay for mortgage insurance, but it is lower than FHA programs. Also, you only need a 620-credit score, with rates lower than FHA-insured mortgages.
The VA mortgage should be your first option if you are a military veteran. You cannot beat its zero-down payment, low mortgage insurance and low interest rate. See the updated VA loan requirements.
USDA Financing and Credit
The next best option for some home buyers with bad credit or average credit is the USDA-home loan. If you want to buy a home in a more rural area and have a lower income and credit, you may be able to get a 100% financing.
The major restriction with this program is that you need to buy a home in what USDA calls a rural area. You will get a faster approval if you have a credit score that is above 620 and 640 in some instances.
Fannie Mae Financing and Credit
Also, you can get a little money down home loan through Fannie Mae that is known as Conventional 97. You only need 3% down and you can get a loan with average credit. However, you should compare your rate and terms to what you can get with FHA if your score is under 680. Check the Fannie Mae down-payment requirements. With the Fannie Mae loan, you pay higher mortgage premiums with a lower credit score.