With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

Home Mortgages: Loan Choices and Options With a Small Down Payment

If you don't have a lot saved for a down payment to purchase a home, a lender will want some protection against a loss in case you default on the mortgage.

Here are options, choices and considerations for a low down payment mortgage:

Conventional Mortgage with Borrower Paid Private Mortgage Insurance

Private mortgage insurance, or PMI, covers some of the lender's loss if you can't pay your mortgage. Monthly PMI premiums vary between 0.5 and 1.5 percent of your annual loan amount. Use a PMI Calculator to see an mortgage amortization schedule showing monthly payments that include PMI costs.

Lenders must cancel PMI once you've paid down your mortgage to 78 percent of the purchase price. Keep track of your loan and contact your lender's customer service department when you are close to reaching that threshold. you may also be able to cancel your PMI policy sooner with the right combination of payying down your loan's principal and property-price appreciation. To learn more, see HSH.com's Homeowner's Guide to PMI.

Conventional Mortgage with Lender Paid Private Mortgage Insurance

Instead of requiring you to pay for PMI, a lender may charge you a higher interest rate to pay for the loan guarantee themselves. This may produce a lower monthly payment than you would have if you paid for the PMI yourself; however, the higher interest rate stays in effect until you sell the house or refinance the loan. Unlike borrower-paid PMI, you can't cancel it and it will not automatically sunset once you've paid your loan down to 78% LTV.

FHA Mortgage

The FHA guarantees loans for homebuyers with a down payment as small as 3.5 percent. For most FHA loans, you pay 1.75 percent of the loan amount at closing and 0.85 percent in monthly premiums for the loan guarantee. With a down payment of less than 10 percent, the MI premium cannot be canceled and the cost will continue for as long as you have the loan. To learn more about FHA loans, see our FHA Loan Guide.

VA Mortgage

Veterans and military service people, as well as their spouses, are eligible for VA loans. No down payment is required for VA loans up to $548,250 in most areas of the country, and up to higher values in expensive housing markets. Like the FHA, the VA provides a loan guarantee, so lenders are willing to loan money to qualifying borrowers even if they have no money to put down. Although you don't have to pay for private mortgage insurance, you do have to pay a VA funding fee, which ranges from 1.5 to 3.3 percent of the loan.

Other Options

There can be alternative programs available with small down payments. Fannie Mae and Freddie Mac offer programs with income or geographic restrictions that allow for as little as 3 percent down. These include standard Conventional 97 offerings (available to those who haven't owned a home in the last three years), and HomeReady and HomePossible programs (income/geographic limits). You can compare these offers against FHA-backed loans using our low down payment mortgage comparison tool. Also, state housing finance agencies also provide first-time homebuyer programs and assistance for borrowers with low incomes who are looking for mortgages with low or no down payment.

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