Options for Low Down-Payment Loans

About 60 percent of first-time home buyers make a down payment of 6 percent or less for a home, according to the March REALTORS® Confidence Index.

But with rising insurance premiums for loans insured by the Federal Housing Administration, traditionally a popular first-time buyer option, more first-timers are having to look elsewhere for financing their home purchase, The New York Times reports. First-time buyers are looking to special programs through banks, state and local down payment assistance programs, and their own families for assistance in purchasing a home.

More lenders are offering low down payment programs. For example, T.D. Bank offers the Right Step mortgage, which features a minimum down payment of 3 percent (down from 5 percent), and a maximum debt-to-income ratio of 41 percent. Private mortgage insurance is not required with the loan for applicants who are making down payments of less than 20 percent. Instead, the lender requires all applicants to go through a housing education class.

“We’re enhancing this program to provide financing to more eligible borrowers, but we don’t feel as if we’re easing the credit guidelines,” says Malcolm Hollensteiner, T.D.’s director of retail lending. “Our goal is to increase the pool of creditworthy borrowers.”

Down payment assistance programs are being offered through state and local housing agencies. For example, in Long Island, the Community Development Corp. has teamed with the Housing Development Fund to provide a SmartMove program, offering first-time buyers down payment assistance via a second mortgage. Qualified borrowers can put down as little as 1 percent and cover up to 20 percent of their purchase price through a second mortgage, which then eliminates the need for private mortgage insurance. The 20-year loan has a low rate of 3 percent.

Families are also stepping in to help more first-timers buy. For example, National Family Mortgage in Waltham, Mass., sets up intra-family financing at low interest rates, The New York Times reports. The loans meet IRS requirements for a loan, as opposed to a taxable gift.

Source: “Low-Down-Payment Loans,” The New York Times (May 1, 2014) and “60 Percent of First-Time Buyers Put Down 6% or Less,” National Association of REALTORS®’ Economists’ Outlook Blog (May 1, 2014)