Buy With a LOW Down Payment!

There are several reasons to buy a house.  Many people buy their first house to take advantage of the tax benefits while others buy a house to take advantage of increasing house values.  These are just two of many great reasons to buy a house. 

Keep Your Money!  If you rent your house (or apartment) you are helping your landlord to pay his or her mortgage and putting your hard earned dollars into his or her pocket! 

Real estate in the United States has appreciated at an average rate of 93% and California has seen a 77% increase in real estate prices over the past 20 years. (ForecastChart.com)

Do You Have 3.5%?  You say that you want to buy a house but you just don’t have the down payment?  Read the article below to learn how you may be able to buy a house with a low down payment as low as 3.5%!

Contact me if you would like to discuss your specific circumstance. 

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How to get a mortgage with less than 20 percent down
Yahoo Homes By Jennifer Berry October 11, 2013

Don’t have the money on hand for a 20 percent down payment? Don’t let that stop you – you can still get a mortgage with a low down payment.

If you don’t have 20 percent to put down on a new home, that doesn’t mean you can’t buy one. Does that surprise you? Then listen to this: there are all kinds of strategies for prospective home buyers who can’t get the cash together for the traditional 20 percent down.  (Contact me to discuss your personal situation. – TB)

In fact, homebuyers could get a loan with as little as 3.5 percent down through the Federal Housing Administration.  If you’re interested in hearing more, you’re in the right place. Let’s take a deeper look into ways you can get a mortgage with a low down payment.

Strategy #1 – Get Private Mortgage Insurance (PMI)

Wondering how you could avoid living with Mom and Dad until you’ve saved up that 20 percent down payment for a home? Private mortgage insurance (PMI), might be the answer you’re looking for. PMI is basically an insurance premium you pay each month when you put down less than 20 percent on your mortgage.

“The cost of PMI will depend on the loan to value ratio (LTV) and on the borrower’s credit score”. The LTV is the ratio between the amount you want to borrow and your home’s value. The larger that ratio is, and the worse your credit score is, the more you might have to pay for PMI.

That means that if you put 10 percent down and you have a credit score of 760, you could be paying $99 a month for PMI. But if you put down 3 percent and had a credit score of 760, you could be paying $279 for the same loan. Have a credit score of 700? That premium could jump to $330 a month.

But there is some good news: “Sometimes these [insurance] premiums will disappear altogether once you hit the 20 percent equity mark on your home.

That could happen if you pay down the principal on your loan to 80 percent, or if the value of your home goes up and you have 20 percent equity in your home as a result. Be sure to check with your lender on their policies surrounding eliminating private mortgage insurance.  (Appreciation can build your equity more quickly.  Two years of appreciation at a rate of 10% per year and your equity will have increased by 20% over a two year period. – TB)

Strategy #2 – Get a Federal Housing Administration (FHA) Loan

Since the Federal Housing Administration insures the loan – meaning they take on the risk associated with you possibly defaulting on the loan – you’re generally allowed a lower down payment. That can be as low as 3.5 percent of the loan.

Plus, it’s typically easier to qualify for an FHA loan than a conventional loan – meaning you can have a lower credit score, for example. Sound too good to be true? Well, an FHA loan does come with some drawbacks.

The disadvantages are that the mortgage insurance is comparatively expensive and will be there for the life of the loan. That’s in contrast to a conventional loan, where as we discussed, you could get rid of PMI after you have 20 percent equity in your home.  (FHA loans are available with lower credit scores.  Many people start with an FHA loan and then refinance to remove the PMI (insurance) when their equity exceeds 20%. – TB)

Now let’s look at the cost. There are two components to the insurance on an FHA loan. The first is called Up Front Mortgage Insurance (or UFMIP). It equals 1.75 percent of the loan amount, and it’s paid once, usually by adding it to the loan amount.

The second is the Monthly Mortgage Insurance Premium (or MIP), which is an annual premium paid monthly (like you’d pay for your car insurance, for example). MIP can vary from 1.30 to 1.35 percent depending on your loan-to-value ratio (your loan amount compared with the value of your home), paid monthly.

Strategy #3 – Get a “Piggyback Loan”

Have you ever heard of a “piggyback loan” when it comes to mortgage financing? This used to be very common. It basically means a homeowner would get one loan for 80 percent of the value of the house, and then a line of credit on top of that up to the remaining 20 percent of the value of the house.

Because of this, many people got into homes without any down payment at all. But the problem is that not all of them could afford the monthly payments on those loans.

There were huge losses in the wake of the meltdown, so banks are very reluctant to make these kinds of loans today”. Most lines of credit are capped at a total loan to value of 80 percent, so they will be of little or no help to a buyer with a small down payment.

That’s not to say these loans no longer exist, and that there aren’t exceptions. But before you go looking for one of these, you might want to speak with a mortgage professional who can examine your particular situation and talk through the pros and cons with you.  (Piggyback loans have becoming more popular, and more available, over the past year or so. – TB)

While this strategy might get you into a home, the interest rate on a home equity line of credit is usually higher than that of a mortgage, and often increases throughout the course of the loan. In the end, the final payment is considerably larger than the normal payments. So, while this is a viable solution, it can add up in the long run.

Strategy #4 – First-Time Home Buyer Programs

If you’re thinking about buying your first home, you’re probably feeling both excited and nervous. And chances are you might not have saved up 20 percent to put down on that first home either. Well, here are some resources for first-time home buyers that could help make the process a little less frightening.

Different states and communities have different programs to help first-time home buyers. One example is the California Housing Finance Agency (CAlHFA), which has a number of programs for first-timers including the California Home Down Payment Assistance Program (CHDAP).

With CHDAP, the buyer receives a loan of 3 percent of the purchase price. This loan can be used for a down payment or closing costs, and doesn’t have to be repaid until the first mortgage is paid off through refinance or sale. It could benefit you to check into whether your state has a similar program.

One or more of these strategies could be right for anyone who doesn’t have a large down payment.