The U.S housing market has rebounded. With mortgage rates still south of 4 percent…the monthly mortgage costs for owning a home are still less than the cost of rent in many U.S. cities.
A home’s monthly payment…however…is just one part of the mortgage financing puzzle. Many buyers are worried that having limited funds for their first payment…the down payment…could keep them out of the game.
The good news: According to the National Association of REALTORS® Profile of Home Buyers and Sellers – 73% of U.S. home buyers made a down payment of 20% or less! Thankfully…for buyers like these…there are a host of low – and no-down payment mortgage options for qualified borrowers.
Here are a few every Buyer should know about to help eliminate one of the top worries:
- Putting a 20% down payment –
Putting 20 percent down on a home is the ideal situation…if you have the money…since you avoid paying for private mortgage insurance (PMI).
- Putting a down payment less than 20%
Putting less than 20% down just means you will need to have Private Mortgage insurance (PMI) added into your loan. PMI is where you pay for an ‘insurance’ policy that will reimburse the bank…in the event you default on the mortgage.
PMI is paid in the form of a small fee at closing…that is usually built right into your closing costs…then there is a small fee per month added to your monthly mortgage payment.
Paying PMI is VERY common…so don’t let this concern you. And with a conventional loan…PMI is usually dropped once you have 20% equity built up in your
home…as prices rise. You’d probably need to get an appraisal to confirm the equity you have later on.
- Putting a down payment of 3 ½%
This usually this would be an FHA loan…which are loans insured by the Federal Housing Administration.
The FHA itself does not make loans…rather it’s an insurer of mortgages offering mortgage lenders protection against default. So long as the loan meets the FHA minimum standards — a series of rules known as “guidelines” — the FHA will insure it against loss.
Among the FHA guidelines is the requirement that home buyers make a down payment of at least 3.5% against a home’s purchase price. Example – For every $100,000…that amounts to $3,500 due at closing.
However…as compared to conventional financing… the cost to insure an FHA mortgage requires an upfront PMI cost of 1.75 percent…plus an annual cost which ranges up to 1.55%, depending on the loan size and term (i.e. number of years). This PMI fee is added into your monthly mortgage
But unlike conventional mortgage PMI fees…beginning June 3, 2013…some FHA loans will require that annual mortgage insurance be paid for as long as the loan is “active”. So PMI monthly fees do not drop off after your reach 20% equity in your home.
For this reason, home buyers making a down payment of between 5-10 percent should consider both FHA and conventional financing…and choose the program which suits best.
- Putting a down payment Of 3%
For buyers wishing to put less than 3.5% down on a purchase, there is a Fannie Mae Conventional 97% mortgage.
Among low down payment mortgage programs…the Conventional 97 program is unique in that it allows a buyer’s down payment to come from either their own cash or gift funds entirely. It’s often less costly as compared to FHA financing too…as a result of less-expensive PMI mortgage insurance premiums.
Not all loans will meet the Conventional 97 program’s minimum standards…however. For example, the program is valid for 1-unit homes only, and loan sizes may not exceed $417,000.
The Conventional 97 program is valid for primary residences only.
- Putting a down payment Of 0%
Lastly…for qualified buyers…there are 100% financing programs available. These products are typically government-backed.
The two most common zero-down programs are the Department of Veteran’s Affairs VA loan…and the U.S. Department of Agriculture’s Rural Housing Loan. These loans are:
VA Home Loans
VA home loans are available only to qualified military personnel exclusively. Loans are available for up to 100% of a home’s purchase price….and have no PMI mortgage insurance requirements whatsoever. Furthermore…because mortgage rates for VA loans are often low as compared to comparable conventional financing…VA loans can be a viable choice for military buyers putting down any amount less than 20 percent.
Homeowners with VA loans also benefit from access to the VA Streamline Refinance program — among the simplest…most-effective refinance programs available today.
USDA Home Loans
In our area…the most common 100% financing loan are the USDA mortgages. To qualify, the home must be within a pre-approved USDA census tract…which includes many areas around Marion County…and the buyer must earn an income which does not exceed local norms. The USDA charges a small annual PMI mortgage insurance-like fee of 0.40%. For eligible home buyers…however…the effects of this cost are countered by ultra-low mortgage rates and the
ability to buy a home with nothing down.
So lending hurdles aren’t as high as you might think…these are all GREAT loans to get!
For today’s home buyers…there are a multitude of low and no-down payment mortgage options. Use the above as a guide…and connect with your local Mortgage pro to help match you with the programs that best suit your needs.
As the housing market expands with both first-time and repeat buyers…demand for homes will increase. Knowing today’s financing options can go along way toward buying your dream home!