Beyond FHA Loans: How to Buy a Home With a Low Down Payment

Its a big roadblock on the path to homeownership: the down payment. Now some lenders are backing away from FHA loans, the key program allowing low down payments and favorable interest rates for many new buyers.

These lenders say strict regulations cause them to shy away from FHA loans. And recently some of the largest banks have effectively eased themselves out of the FHA market by slapping additional credit requirements on top of FHA lending standards.

But there are a couple of other federal loan programs that lenders love -- and first-time homebuyers will, too.

A down payment thats tens of thousands of dollars less

Renters are placing a greater priority on building their emergency savings, socking away money for retirement or their childrens education than on saving for a down payment on a home, according to a 2015 survey by Freddie Mac.

Its no wonder: The traditional 20% down payment that most lenders prefer can be an awfully big number to hit. For example, its 60,000 on a 300,000 home. And thats before closing costs and other buying-a-home expenses.

But something around 3% down -- now, that can seem doable. Its about 10,000 down on the same 300,000 home.

A 3.5% down payment option has been the big draw for FHA loans. But two other government sponsored programs are offering 3% down home loans, backed by Fannie Mae and Freddie Mac.

Dont sweat it, well keep this simple. Heres what you need to know.

Home loans lenders like to make

Fannie, Freddie, FHA: They all sound the same, right? But theres a big difference to lenders -- and theyre the ones youll be working with on your home loan. They know the ins and outs of all three and deal with that; you just need to know what options are out there.

While some of the largest lenders have been turning their backs on FHA loans, they like Fannie and Freddie-backed mortgages -- which are considered conforming loans -- because they dont have to wade through all the regulations and restrictions of FHA-backed mortgages.

While FHA loans still serve their purpose for some buyers, folks with (credit) scores above 720 usually find conforming loans a better option, especially now since they can put as little as 3 to 5% down, Ted Rood, a senior loan officer in St. Louis with 15 years of experience, tells NerdWallet.

Rood says borrowers can even get help with the down payment. With these programs, the down payment can be a gift.

But there are some restrictions built into the programs that let you borrow up to 97% of the homes value, he says. At least one of the buyers has to be a first-time homebuyer (meaning you havent owned a home in the past three years), the home must be your primary residence and only fixed-rate mortgages are offered -- adjustable-rate loans are not eligible.

You will also pay for private mortgage insurance. But you may be able to cancel PMI after you reach 20% equity in your home with a Fannie Mae or Freddie Mac backed loan, while FHA mortgage insurance is charged for the life of the loan.

For borrowers who arent first-time homebuyers, Rood says there are other loan programs with down payments as low as 5%.

The bottom line

FHA loans are still an option for first-time homebuyers, especially if your credit is less than perfect. But youll probably need to look for smaller, independent FHA-approved lenders.

But if you have good credit, Fannie- and Freddie-backed loans open up new possibilities for qualified borrowers who just cant quite get over that 20% down hurdle.

And remember to shop a handful of lenders to find your best mortgage rate and best-priced home loan.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website.

This article was written by NerdWallet and was originally published by Redfin.

The article Beyond FHA Loans: How to Buy a Home With a Low Down Payment originally appeared on NerdWallet.