St. Louis Mortgage Help

Low Down Payment Alternative to FHA - St. Louis MO

January 24th, 2018 10:08 AM by Bob Rutledge

The 3% Down Alternative to FHA

It seems that a lot of people think that Conventional financing requires a minimum down payment of 20% or more.

I am shocked at how many folks I speak to every day that think that a conventional loan is not an option for buying a home with a low down payment.

Both Fannie Mae and Freddie Mac, the conventional mortgages, have special loan programs available that, based on your income, and/or the geographic region you are buying in, allows you to buy with as little as 3% down payment.

Normally Better Credit is Best

With normal conventional loan programs they tend to favor better credit scores, through their risk based pricing they punish borrowers with lower credit scores with costs to the lender that increase interest rates if you are not perfect in the eyes of Fannie or Freddie.

If you’re one of those homebuyers, or homeowners that has excellent credit to decent credit, but not a lot of equity or money for a down payment, you may be surprised at conventional loan options offer.

Fannie Mae HomeReady

Fannie Mae’s HomeReady program is designed to meet the diverse needs of today’s buyers using flexible underwriting guidelines for credit worthy low-to-moderate income borrowers trying to finance a home.

HomeReady Better Features

  • Income from non-borrowing household members can be considered as a compensating factor to allow debt to income ratio greater than 45%, up to 50%.

  • Can use income from rental unit and boarder income for qualifying.

  • Allows non-occupying borrowers, like a parent, to help meet debt to income requirements.

  • Financing up to 97% loan to value for the purchase of a one-unit principal residence.

  • Financing up to 95% loan to value for limited cash out refinances, or 97% loan to value if mortgage being refinanced is owned or guaranteed by Fannie Mae.

  • You are NOT required to be a first time home buyer to qualify for this program

  • Private mortgage insurance is discounted, in many cases below that of FHA and a regular conventional mortgage.

  • Gifts, grants, community seconds, and cash-on-hand can be used as a source of funds for down payment and closing costs.

  • Nontraditional credit is allowed.  An example is rental history, or utility and insurance payments.

    Qualifying Requirements for HomeReady

    Borrowers using HomeReady are required to meet certain criteria that are not necessarily required if you’re using a traditional conventional loan with a maximum loan to value of 95% (5% down payment for purchase).

    Homeownership Education Requirement – A homeownership education course may be required unless you have previously taken a course required by a community seconds program, or if you’ve completed a course from a recent attempt to purchase another home.

    Income Eligibility – HomeReady is available to any homebuyer or homeowner that meets the income limits of the property location.  The income limits may be waived if the property is located in a “targeted” low-to-moderate income Census Tract.

    You can look up the income and property eligibility by entering the address of the home you’re interested in into Fannie Mae’s Eligibility Search Tool Here

    Freddie Mac Home Possible Mortgages

    Freddie Mac’s Home Possible mortgage offer low down payments for low-to-moderate income homebuyers, or buyers in high-cost or underserved communities.

    Freddie Mac offers two different low down payment options, Home Possible 95% Loan to Value, and Home Possible Advantage 97% Loan to Value. I will only address the 97% or 3% down payment option.

    Home Possible 97% Features

  • Maximum loan to value 97%.  Minimum 3% down payment for purchase.

  • 1-unit single family unit homes, condominiums, and planned unit developments are eligible.

  • Flexible sources of down payment.  Down payment can come from a variety of sources, including friends and family, employer-assistance programs and secondary financing.

  • No cash-out refinancing is available up to 97% loan to value for borrowers who occupy the property.

  • Income flexibility.  Borrowers with income above the area median income (AMI) may be eligible in high-cost areas.  No income limits in underserved areas.

  • You can check eligibility by using Freddie Mac’s Home Possible Income & Property Eligibility Tool Here.

  • Private mortgage insurance is discounted, in many cases the monthly mortgage insurance is well below that of a regular conventional mortgage and below that of FHA

  • All borrowers must live in the property.  Non-occupying borrowers not allowed at 97% loan to value.

    How Do I Choose The Best Option?

    There is very little to no difference between the costs and interest rates of these two programs, so it comes down to your financial situation that may determine which option is best for you.  In a sense, the best option chooses you.

    FHA, HomeReady, or Home Possible should all be considered for many home buyers that in the past were placed only in a FHA mortgage. What use to be has changed, if yesterday you were a FHA mortgage today you may have a better option

    A common example is if you have student loans with Income Based Repayment (IBR) payments. FHA, Freddie Mac, and Fannie Mae all handle this situation differently.

    Another example is that the targeted income and property lookup tools offer different results.  If you look up a property using Fannie Mae’s HomeReady lookup tool, you may make too much income to qualify, whereas if you look up the same property using Freddie Mac’s Home Possible lookup tool, you may qualify. FHA does not have a maximum income limitation.

    If you are considering a new home purchase and want a low down payment option you need to consider a mortgage lender that has experience with FHA, Home Possible, and HomeReady, and is willing to consider all possible options for you.

    If you want to talk with me about what options are available to you please contact me, Bob Rutledge, at 314-628-2218 or email me at brutledge@usa-mortgage.com


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