Lenders offer numerous special loan programs that allow small down payments or feature other benefits. Some target first-time homebuyers, while others primarily help people who don't make much money.
If you need extra help getting into a home, you should check with your bank or credit union to see if they offer any of these special mortgages. State housing agencies, local HUD offices, and Consumer Credit Counseling Service branches can usually provide references too.
Here's a brief summary of some of the more popular programs.
Mortgages backed, but not issued, by the U.S. government, VA loans help veterans and their spouses buy homes. No down payment is required (except for relatively expensive properties), and other benefits may apply. The government says it is more understanding than conventional lenders toward borrowers who default.
Mortgages administered by the Department of Housing and Urban Development (HUD), FHA loans are backed, but not issued, by the U.S. government and feature easier credit qualification, down payment, and underwriting standards than conventional loans. HUD collects mortgage insurance payments from borrowers and repays lenders in full if those borrowers default.
The Department of Agriculture provides low-interest, no-down-payment loans to farmers and other qualified borrowers with low to moderate incomes buying property in rural areas or small towns who are unable to obtain loans elsewhere.
Many state and local housing agencies sponsor programs to help first-time buyers who meet specific income guidelines or who are willing to buy homes in certain locations. Loans feature low down payment requirements, subsidized interest rates, help with closing costs, and other benefits.
The late 1990s brought a new wrinkle in FHA-insured loans. The FHA required buyers to make down payments of at least 3%, but also allowed nonprofit agencies to bestow gifts of down payment money to buyers. Nonprofit agencies sprung up to do just that; not exactly what the FHA intended, but the federal government has passed on opportunities to stamp out down payment assistance programs.
Down payment assistance requires the cooperation of the seller, buyer, and lender. The seller agrees to donate money to the down payment assistance program (usually equivalent to a 3 percent down payment). At closing, the program gives the money to the seller out of the program's pool of money. Immediately afterward, the seller gives the program a contribution equal to the down payment plus a processing fee. This satisfies the FHA's regulation that prohibits the seller from giving the down payment directly to the buyer.