Michael Kwiatkowski is a Wisconsin based Realtor, but he graciously allowed me to re-post the information here for my friends and neighbors!
Two days ago, I asked "Let's say that you want a home but can't hack a 20% down payment. What are your potential options to still buy a home?"
...and then my inbox exploded when you all responded. WOW. I didn't realize just how many of you were interested in this question!
Well, it's no secret that lending guidelines are stricter since the crash in 2007. These guidelines often preclude old creative methods like second mortgages, 80/20 split mortgages, and other "creative financing" methods common during the better days. That's the bad news. The good news is that you don't need to squat, enter into a ruinously-termed adjustable rate loans, start bartering, add wheels and call it a RV, or even get into looting and bank robbery!
First method- FHA. The US Department of Housing & Urban Development (HUD) has a division called the Federal Housing Administration (FHA). The FHA will insure home mortgage loans made by FHA-approved lenders (and there are a lot of these lenders). You're basically going about getting a bank loan as normal, except that the requirements are more relaxed. FHA-backed loans will cover 1-4 dwelling unit properties. The minimum necessary down payment is 3.5%. Buyers can receive up to 6% of closing cost assistance from the seller (smart Realtors will help you make that part of your offer). There are limits on the amount that can be financed. (Here in WI, the single family limit is generally $271,500. The Madison metro area is $293,750. Milwaukee's metro area is $315,000. The small area inside Wisconsin around Minneapolis MN, St. Paul MN, and Bloomington MN is $365,000. And using only math as the government can, the limit in the Kenosha area is $410,000 because the feds consider Kenosha to be a Chicago suburb. These figures go up if you're considering a 2-family, 3-family, or 4-family.)
Other things to consider: Aside from 3.5%, you'll also need a 620 credit score. Some lenders will go below 620, but then you'll receive a higher interest rate. While the feds will allow seller contributions of 6% toward prepaids and closing costs, nearly all lenders limit this to 3%. There will be more paperwork associated with a FHA loan. A federal inspector will review your potential home. They will kill deals over big issues (roof is about to go) or seemingly small ones (peeling paint). This often means that sellers and their Realtors look askance at loans contingent on FHA financing. (Though FHA financing is totally normal and acceptable with first-time buyer properties.)
Finally, through the FHA 203(k) program, you can wrap rehab funding into your home loan! FHA also does energy efficiency loans, mobile/manufactured home loans, and quite a bit more!
Second method - VA. The US Department of Veterans Affairs (VA) guarantees mortgage loans to Veterans, their spouses, and widows/widowers of Veterans who have not remarried. VA loans require no down payment and cover 1-4 family properties. The VA charges a fee of up to 3.00% (it can be less) which may be wrapped into the loan. The normal loan limit is $417,000 (it's that way throughout WI), although other areas of the country can have higher limits (three counties are over $1,000,000!).
As with the FHA loan, a VA loan still requires a credit check. VA loans allow the seller to pay all of the buyer's closing costs or up to 6% of the purchase price, whichever is less. That government inspector will be back to be sure that there's no peeling paint (or worse). Unlike FHA, most sellers do not frown as much at VA loans. While there's just as much extra BS and paperwork, it probably has something to do with it being a veteran's loan.
Third method- USDA. Yes, the friendly US Department of Agriculture is there to help you buy a home, too! Far less known than FHA or VA loans, the USDA offers the normally Veterans-only no down payment benefit to non-Veterans! The catch is that USDA loans are only available in defined "rural areas," can only be used for single family homes, and income guidelines apply. Now, how rural is rural? Remember that the Feds are involved, so it won't always make sense! (Here in WI, Milwaukee County is totally out. However, a small portion of Ozaukee County, half of Waukesha County, most of Racine County, most of Washington County, and plenty of other areas are completely available!
Be sure to remember that helpful federal inspector and extra paperwork. But if you're willing to go through the trouble, you might be able to land a solid deal!
Fourth method - local programs and initiatives. You may be surprised just to learn how many different public and private programs and initiatives are out there to help you buy a home. There is no way I can touch on all of them, and these programs come and go.
1. Check with city hall and with any "economic development" groups/corporations. They're going to have lists of possible programs, grants, loans... You may also get good information from the local "housing" office.
2. Google. Start Googling every term that comes to mind! Let's say you want to live in Milwaukee, WI. I'd start searching for Milwaukee housing, Milwaukee home grant, Milwaukee down payment assistance, Wisconsin housing, Wisconsin home grant, Wisconsin down payment assistance... You get the idea. ;-)
3. Check with the local Alderman's office about programs for affected areas. Sometimes you will run into TIF (Tax Incremental Financing) districts to help blighted areas (and the definition of "blighted" can get pretty creative!). Or maybe the Alderman has some information that isn't online or down at City Hall!
4. Check with any area neighborhood organizations. They usually know what's up and can help to point you in the right direction. These folks may also know about homes not yet on the market (upcoming foreclosures, etc.) before Realtors will!
5. Check the official state website, official state housing office, and call the governor's office. This method (especially related to the governor) usually doesn't work well. But there's often pay dirt to be found in state housing offices!
Fifth and final method- PMI. PMI is Private Mortgage Insurance. It's insurance on a standard, conventional mortgage when the down payment is below 20%. The borrower pays an additional premium every month until 20% of the loan is paid off.
