Even if first time home buyer grants can lower the purchase price, you typically still need to finance the remaining balance. A home loan can pay the majority of a home’s purchase price, but many lenders require you to pay a down payment. You may need help buying first home properties if you cannot save enough to pay a percentage of the purchase price at closing.

Lenders typically require you to pay a portion of the purchase cost. Decades ago, the standard down payment amount was 20%. But now, the majority of homes are six figures, and small percentages add up fast. A 20% down payment of the median home price is around $87,000. 

Lenders set down payment requirements. They may offer a lower interest rate if you pay a higher percentage. However, lenders must accept lower rates with government-backed loans from agencies like the following:

·      The Federal Housing Administration (FHA)

·      The US Department of Veterans Affairs (VA)

·      The US Department of Agriculture (USDA)

Each government loan has its own set of unique requirements, but all of them have down payment requirements as low as 3.5%. 

Lenders also lower their credit score standards with FHA, VA, or USDA loans since they are less risky. If you default on a government-backed loan, the government will pay the lender and assume ownership of the property. 

With conventional loans, private lenders often consider the following: 

·      How much you need to pay at closing. The bank decides a minimum percentage of the purchase price you must pay as well as closing costs.

·      How much the loan will cost you. Closing costs are just one part of what the lender charges you for the loan. You will also pay a percentage of the loan as a monthly fee for the debt.  

·      Your credit score. Your credit score can influence your loan terms. A higher score usually means that you qualify for the best mortgage rates, low down payment requirements, and lower rates. 

·      How you plan to repay the loan. Lenders want to know how much you earn, your debt-to-income ratio, and how long you have worked at your current employer.

The loan’s terms can influence how much you have to pay at the time of the sale and for the duration of the mortgage. Government loans almost always have better terms since the lender can offer lower rates with the government promise to pay if you default. 

Below are the general terms for the government-backed home loans:

·      FHA loans

o   Down payment at least 3.5%

o   Credit score minimum of 580

·      VA loans

o   No minimum down payment

o   No minimum credit score, but lenders prefer at least 580

·      USDA loans

o   No minimum down payment

o   Credit score minimum of 640

The above government loans are “nonconforming” since they do not match the guidelines for Freddie Mac and Fannie Mae loans, which are held by a private company under government conservatorship.  

For Freddie Mac and Fannie Mae, low down payment mortgage minimums can be as low as 3%. However, you generally need a higher credit score of 620 or 640 and no recent negative marks on your credit report. A down-payment assistance loan can help you pay your down payment requirement and other closing costs, but you need to repay the funds. Alternatively, you can put off paying back the down payment until you sell the home with a deferred mortgage.