Pros and Cons of a Low Down Payment
When it comes to a down payment on your home, are you aiming high or low? The down payment is the number one reason most buyers wait longer than they’d like to buy a home. In fact, many sidelined buyers have the income and qualifications to make the monthly mortgage payment, but lack the down payment.
But, there’s also a misperception about 20 percent down. In a NerdWallet study, 44 percent of Americans believe you need 20 percent or more to buy a home. The reality is that about 60 percent of homebuyers financed their purchase with a 6% or less down payment, according to the National Association of REALTORS®.
But, how low is too low for your down payment?
The fact is there are no cookie cutter mortgages — your home financing will be as unique as you. FHA is known for their low down payments for first-time homebuyers, but many conventional fixed rate loans offer lower than FHA’s 3.5% down.
What about zero down? VA loans for armed service members and qualified veterans provide a great value, including no down payment, relaxed credit requirements and no mortgage insurance. (Plus, down payment programs may help with closing costs and even an equity boost.)
In certain areas there is the USDA Mortgage that also provides a zero down payment option, low interest rates, relaxed credit guidelines, but with income restrictions depending on where and number of people to live in the new home.
Some lenders offer grants to buyers to overcome the down payment hurdle. But, according to guidelines from Fannie Mae and Freddie Mac, lenders can make contributions to a borrower’s down payment or closing costs only after the borrower has contributed a minimum 3% down payment.
“To meet that 3% threshold, the borrower can still come with funds from a relative, a government agency — such as grants from a housing finance agency — or from an employer housing program. That has not changed,” says Lisa Tibbitts, a spokeswoman for Freddie Mac.
Let’s take a look at the pros and cons of a smaller down payment.
The Pros:
You can buy a home sooner. With a lower down payment, you’re putting less down and not saving as long before you get in a home. It can help you secure a loan at today’s low rates and avoid any rent increases that may be on the horizon.
You’ll have more reserve funds on hand. When you buy a home, there are many other related costs, including home repairs and improvements. With a smaller down payment, you’ll avoid being “house poor” as soon as you leave the closing table and can enjoy using some of your hard earned dollars to make the home your own.
Down payment programs can help. Don’t overlook down payment programs as part of your home financing. These programs can help boost your down payment savings or even provide a tax credit for the life of the loan. Some programs provide affordable first mortgages with a very low down payment.
The Cons:
Your monthly payment will be larger. When you put less down, your home loan — and monthly payment — will be larger. Work with your lender to ensure you are comfortable with the monthly payment.
You may be required to pay mortgage insurance premiums. Some down payment programs may waive mortgage insurance (MI), but in most cases if your down payment is below 20 percent, you’ll be required to get MI — it helps manage risk for your lender and protect them if you fail to repay the mortgage. It’s important to note that with a conventional, fixed rate loan and borrower paid MI, you can cancel your mortgage insurance when you reach 20% equity in your home. With an FHA loan, you must continue to pay MI for the life of the loan.
Could hurt in a competitive market. Unfortunately, some sellers see smaller down payments as a negative, although it’s not necessarily true. In fact, the seller may actually earn less on the home from an all cash buyer with a lower offer. Plus, some down payment programs will fund your closing costs — something you won’t have to negotiate with the seller. Put the seller at ease by getting your financing set up early and documenting it in a letter accompanying your offer.
The bottom line? The right down payment for you depends on your situation. Weigh the overall pros and cons of a low down payment and talk with your lender, Bob Rutledge, about what is the best fit for you. Visit www.bobrutledge.com to learn about low down payment options, VA and USDA zero down payment programs, and down payment assistance.
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
Zero Down Payment Mortgage Options in the St. Louis MO area
Low Down Payment Options in the St. Louis MO area
There are many low to zero down payment options available in the St. Louis MO area and throughout the entire State of Missouri. These options are available to first time home buyers and any home buyer through mortgage programs or down payment assistance help.
Every mortgage program has a low down payment option, the lowest down payment requirement comes with both the VA mortgage and the USDA mortgage program. Both the VA and USDA mortgage are zero down payment mortgage programs.Throughout the State of Missouri there are geographical areas that are eligible for the USDA zero down payment home loan. In the St. Louis MO area there are areas in Jefferson County and St. Charles County eligible for zero down mortgages.Are you a veteran of the United States Armed Services? If you are a veteran then one of the VA benefits available to you is the VA zero down payment home loan. I consider the VA mortgage the #1 best mortgage available!Both Fannie Mae and Freddie Mac, these are also called the conventional mortgages, have multiple low down payment programs. The lowest down payment with either program is 3 percent, but there both Fannie and Freddie have two different 3% down payment programs. There is what I will call the regular conventional 3% down payment home loans, that go by all the regular conventional underwriting guidelines.Then there is the Fannie Mae Home Ready and the Freddie Mac Home Possible 3% down payment mortgage program. This program is designed to help more people become home buyers, there are more flexible underwriting guidelines to help, better interest rates than the regular conventional mortgage, better mortgage insurance rates, and a lot more to help you become a home buyer. I have been using this program a lot more lately since it was first rolled out.
The FHA Mortgage Program, is the best known of the low down payment mortgage programs, FHA has a minimum down payment requirement of 3.5% as long as your credit score is above 580. If the qualifying down payment is below 580 there is a required 10% down payment. The FHA mortgage is known for helping many people with low to no credit scores become home buyers. The underwriting guidelines for FHA mortgages are the most relaxed in the industry and is sometimes referred to as a first time home buyer mortgage program but it is not just for first time home buyers.The lender I work for, USA Mortgage, has come out with our own 1% down payment program that has been helping a lot of new home buyers in the St. Louis MO area. The USA Mortgage 1% down payment program works hand in hand with the Fannie Mae HomeReady program to make for a very flexible low down payment option.If you can't utilize the VA or USDA mortgage programs to get a zero down payment, there are ways to get your down payment paid for you through down payment assistance programs.BTW, down payment assistance is not just for first time home buyers! There are down payment assistance programs that serve only first time home buyers but the State of Missouri, MHDC, and the Next Step down payment assistance program is not only for first time home buyers.The MHDC programs, First Step and Next Step, will prove up to a 4% assistance to be applied toward your down payment, closing costs, or both. There are also many local down payment assistance programs in various counties and/or cities throughout the St. Louis area that will provide down payment help from $3,000 to $5,000 depending on where you purchase a new home. St. Louis City, St. Louis County, Florissant, Jefferson County, many cities in St. Charles County, and unincorporated St. Charles County provide a down payment assistance program that will cover some if not all of your down payment.Confused? You don't have to know it all, that is why you hire a mortgage specialist like myself to help you. If you want to know or learn more you can find a lot of detailed information within my website at www.bobrutledge.com or you call me at 314-628-2218. Please feel free to ask me all your questions, I answer questions every day.