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How 1% Down Payment Mortgage Programs Work

How 1% Down Payment Mortgage Programs Work

  • 1% Down Payment Mortgage Programs Overview
  • There are a number of mortgage programs that enable borrowers to buy a home with a down payment as low as 1% of the property purchase price. Although details of these programs vary, they generally work the same way. Borrowers are required to make a 1% down payment (or less in some circumstances) and then receive a down payment assistance grant from the lender or a local housing agency to add to their down payment. For example, a borrower who wants to buy a $100,000 house contributes $1,000, or 1% of the purchase price, in personal funds toward the down payment and receives a grant for $2,000, or 2% of the purchase price, for a total down payment of 3%.

    The down payment grant enables borrowers to own additional equity in the property when the mortgage closes. The total amount of down payment required from the combined contribution of the home buyer and the grant depends on program guidelines but is typically 3% of the purchase price.

    In the past, borrowers who wanted to purchase a home with 1% down would typically combine a down payment assistance grant with a government-backed programs such as the FHA mortgage program, which requires a 3.5% down payment. Other government-backed programs include the VA home loan program that enables eligible military personnel and veterans to buy homes with no down payment and the USDA home loan program that enables low-to-moderate income borrowers to buy homes in rural areas.

    While these government-backed programs continue to represent attractive mortgage options for many home buyers, several lenders also offer conventional 1% down mortgage programs. Conventional mortgage programs are not backed by the government. These conventional programs represent another low down payment mortgage alternative for low-to-moderate income individuals. There pros and cons with both government-backed and conventional mortgage programs but in certain cases conventional programs may require borrowers to pay lower extra fees or offer other advantages.

    Additionally, the monthly private mortgage insurance (PMI) you may pay for a conventional low down payment loan is usually cancelable when your loan-to-value (LTV) ratio reaches a certain level -- usually 78%. By comparison, you are required to pay mortgage insurance on government-backed programs such as FHA and USDA loans for the entire mortgage regardless of your LTV ratio.

    Most conventional 1% down payment mortgage programs are offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Without getting into the details, these lenders typically partner with what is called a government sponsored entity, or GSE, to offer the programs. Fannie Mae and Freddie Mac are the two largest GSEs and buy mortgages from lenders so that lenders can offer more loans to borrowers.

    Lenders work with the GSEs to design and implement the 1% down programs and they are usually based off other low down payment programs offered by the GSE. From the borrower’s standpoint, however, the involvement of a GSE is less important because you primarily interact with the lender, and never the GSE, when you apply for a 1% down payment mortgage program.

    Some lenders also partner with local housing agencies, commissions or city governments to implement 1% down programs. These local not-for-profit organizations can play several roles in the mortgage process including administering the down payment grant, providing borrower counseling and marketing the program through community outreach. In cases where a lender is collaborating with a local organization borrowers work with both the lender and housing organization to apply for the program.

    Eligibility, borrower qualification requirements and structure for 1% down payment programs vary by lender. Borrowers should focus on the key items and questions below to understand how 1% down programs work and to determine if it is the right mortgage option for them.  We recommend that you contact multiple lenders to learn more about the low down payment and home buyer assistance programs they offer.

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  • 1% Down Payment Program Borrower Qualification Requirements
  • What is the minimum credit score requirement?

    The borrower credit score requirement for conventional 1% down payment programs usually range from 640 to 700. For borrowers with limited credit history or no score, some lenders may use the borrower’s housing or utility bill payment history to create a non-traditional credit profile, although this is relatively uncommon. The minimum credit score required for the government-backed FHA mortgage program is 580 if you make a down payment of less than 10% and 500 if you make a down payment of at least 10% (borrowers can combine the FHA program with a down payment grant to buy a home with 1% down).  The minimum credit score required for the VA and USDA programs is 620.

    What borrower debt-to-income ratio is used?

    Most 1% down programs apply a maximum borrower debt-to-income ratio of 43% to 45% to determine what size mortgage you qualify for. Debt-to-income ratio represents the percentage of your monthly gross income that you spend on debt expenses including your mortgage, taxes and insurance and other debt such as credit card, car and student loans. For example, if you earn $3,000 per month in gross income and the lender applies a debt-to-income ratio of 45%, you can spend $1,350 on monthly debt payments including your mortgage. The higher the debt-to-income ratio, the higher the mortgage amount you qualify for.

    Does the program have a borrower income limit?

    Most conventional 1% down programs apply a maximum borrower income limit. The income limit is usually equal to or less than the area median income or another specified amount. Use Freddie Mac’s Affordable Income Tool to determine the area median income for your county. Please note that the FHA and VA mortgage programs do not apply income limits while the USDA home loan program does.

    Are borrowers required to take a homebuyer counseling class?

    Most 1% down payment mortgage programs require first-time home buyers to complete a homebuyer counseling class. In some cases both first-time and repeat home buyers are required to take the class. The class focuses on helping borrowers understand how mortgages work as well as the financial commitment required by home ownership. Some lenders offer the class for free while other programs charge a fee for the class.

    Are both first-time home buyers and repeat buyers eligible for the program?

    Most programs are available to both first-time and repeat home buyers although some may only be available to first-time buyers. In most cases, borrowers qualify as a first-time home buyer if they have not owned a home within the past three years.

  • Program Costs and Fees
  • What is my interest rate?

    The interest rate you pay depends on many factors including your credit score and loan-to-value (LTV) ratio. In general, for conventional mortgage programs, borrowers with lower credit scores and higher LTV ratios pay higher interest rates. Additionally, the interest rate on most conventional 1% down payment programs is higher than the interest rate for a regular mortgage or the rate for government-backed low and no down payment programs such as the FHA, VA and USDA mortgage programs. Be sure to shop lenders and compare programs to find the mortgage with the lowest rate and fees.

    Beware of Premium Pricing for 1% Down Mortgages

    Although mortgage rates for most 1% down payment programs are generally higher than for a standard mortgage or government-backed mortgage programs such as the FHA, VA and USDA programs, the interest rate should be comparable to other low down payment conventional mortgage programs such as Fannie Mae's 3% Down Payment / 97% LTV program. Some lenders attempt to charge a higher interest rate for the 1% down mortgage than for a 3% down loan. The practice of charging a higher interest rate for a 1% down mortgage, also known as premium pricing, ends up costing borrowers more in the long run and may actually be prohibited, depending on program guidelines. If you are interested in a 1% down mortgage, make sure the lender does not engage in premium pricing by comparing the mortgage rate for a 1% down loan to the rate for a 3% down loan. The mortgage rates should be approximately the same. If the rate for the 1% down mortgage is higher, you should consider working with a different lender.

    Does the program require the borrower to pay PMI (Private Mortgage Insurance)?

    Almost all conventional 1% down payment programs require borrowers to pay an ongoing monthly private mortgage insurance (PMI) fee which is an additional cost on top of your mortgage payment. PMI is insurance the protects the lender in the event you default on your mortgage. The amount of the monthly PMI fee depends on your LTV ratio, credit score and mortgage program, among other factors. The good news is that conventional 1% down programs do not require the borrower to pay an up-front PMI fee like they do for mortgage insurance on an FHA, VA or USDA loan. Additionally, PMI is removed when your LTV ratio falls below 78%.

    Instead of paying for PMI separately, some lenders offer borrowers a “lender-paid” PMI option where the lenders pays the PMI by charging you a higher interest rate. Lender-paid PMI typically does not make financial sense for borrowers so understand the costs involved before you select that option.

    Does the program require the borrower to pay extra fees?

    Because most 1% down programs require extra involvement from the lender and possibly a local housing organization, borrowers may be required to pay extra fees. Many programs, however, limit the fees or provide grants to offset or pay for these fees. Be sure to ask your lender how much your mortgage closing costs will be and if there are programs or grants available to help you pay these costs.

    Use our personalized mortgage quote feature to review free, no obligation loan quotes from leading lenders.  Comparing mortgage proposals from multiple lenders is the best way to save money on your loan.

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  • Mortgage Type and Amount
  • What types of mortgages are eligible for the program?

    Most 1% down programs limit the types of mortgages that are eligible for the program. Many programs only permit fixed rate mortgages while some also allow adjustable rate mortgages (ARMs) of certain lengths. Interest only mortgages are usually not allowed.

    Does the program have a loan limit?

    Most programs apply loan limits that cap your mortgage amount. For conventional programs, conforming loan limits apply. Loan limits also apply to the FHA and VA mortgage programs but not the USDA home loan program.

    Does the program apply to both home purchases and refinancings?

    Some 1% down programs only apply to home purchase mortgages while other programs also apply to refinances, although no programs permit cash-out refinances.

  • Property Eligibility Requirements
  • What types of properties are eligible for the program?

    Most 1% down programs require the financed property to be a single-family primary residence such as a home or condominium. Co-ops may be allowed with certain programs. Some programs permit multifamily one-to-four unit properties as long as the borrower occupies one of the units. Second homes and investment properties are typically not eligible.

    Does the property need to be in a certain location?

    There are usually no restrictions on where a property is located although borrower income limits may not apply if the property is located in an area designated as underserved. You can use Freddie Mac’s Property Eligibility Tool to determine if the property you are buying is located in an underserved area.

  • Down Payment Assistance Grant
  • How is the down payment assistance grant structured?

    As referenced above, one of the ways to buy a home with 1% down is to combine a low down payment mortgage with a home buyer assistance program such as a down payment grant.  There are different types of grants and the type of grant you receive depends on your mortgage program is structured. Borrowers should fully understand how their grant works including any associated financial obligations such as potentially being required to repay the grant. We summarize the three main types of down payment grants below.

    • True down payment grant. With a true down payment grant the borrower is not required to repay the grant at any point over the course of owning their home. Borrowers should think of this type of grant as a gift. True down payment grants impose no financial obligations or conditions that could require the borrower to repay the grant. These types of grants are typically limited to less than 3% of the property purchase price.
    • Conditional down payment grant. With a conditional down payment grant the grant is forgiven and the borrower is not required to repay it as long as the borrower resides in the home for a specified period of time, which is typically five years. If the borrower sells the property or refinances the mortgage within the specified time period, he or she is required to repay the grant on a prorated basis. If the borrower lives in the home beyond the specified number of years, then the grant essentially becomes a gift and the borrower has no obligation to repay it. Conditional down payment grants typically range from 5% - 10% of the property purchase price.
    • Subordinated second down payment grant. With a subordinated second down payment grant borrowers are required to repay the grant in full, plus interest, when they sell or vacate their home or refinance or payoff their mortgage, regardless of how long they have lived in the property. This type of down payment grant is also called a “silent second” because it is structured similar to a second mortgage but borrowers are not required to make payments on the grant until the repayment event is triggered. Subordinated second down payment grants range in size but can reach 20% or more of the property purchase price.
    • Review Our Comprehensive Overview of Down Payment Assistance Programs
  • 1% Down Payment Mortgage Program Lenders
  • Conventional 1% Down Payment Programs

    Conventional 1% down payment programs are offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions.  Fewer lenders are offering these programs due to stricter regulations.

    Government-Backed Low / No Down Payment Programs

    The FHA mortgage program can be combined with a down payment assistance grant to enable you to buy a home with a 1% down payment while the VA and USDA mortgage programs require no down payment.

  • FHA Mortgage Program
    • The FHA mortgage program enables borrowers to purchase a property with a down payment of only 3.5% but the program can be combined with a down payment assistance grant to enable you to buy a home with a 1% down payment
    • Minimum credit score of 580
    • Maximum debt-to-income ratio of 43% (higher in certain cases)
    • FHA loan limits apply
    • Applies to purchase mortgages and refinancings for primary residences with one-to-four units
    • FHA mortgages are offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions
    • View FHA Mortgage Rates for lenders in your area
    VA Mortgage Program
    • The VA mortgage program enables eligible military personnel and veterans to purchase a home with no down payment
    • Minimum credit score of 620
    • Maximum debt-to-income ratio of 41% (plus residual income requirement)
    • VA loan limits apply
    • Applies to purchase mortgages and refinancings for primary residences with one-to-four units
    • VA mortgages are offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions
    • View VA Mortgage Rates for lenders in your area
    USDA Home Loan Program
    • The USDA home loan program enables individuals to buy homes located in rural areas or small communities with no down payment
    • The property must be located in a USDA-designated rural area
    • Minimum credit score of 620
    • Maximum debt-to-income ratio of 41%
    • USDA income limits apply
    • Applies to purchase mortgages and refinancings for single family primary residences
    • USDA home loans are offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions
    • View Mortgage Rates for USDA Lenders
  • Use the FREEandCLEAR Lender Directory to find lenders that offer the FHA, VA and USDA mortgage programs.

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  • Sources

    Homebuyer Assistance Programs: https://www.fdic.gov/consumers/assistance/protection/mortgages/looking/homebuyer-assistance-program.html

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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