LOW DOWN PAYMENT MORTGAGE OPTIONS FOR YOUR HOME PURCHASE
Purchasing a home, especially as a first-time home buyer, can be overwhelming. This is especially true when it comes to considering how to finance your dream home. Unless you are one of the lucky few who can pay cash, purchasing a home requires obtaining a mortgage loan. There are numerous options for mortgage financing.
Traditionally, mortgage loans for home purchases required a 20% down-payment. This means that 20% of the purchase price must be from funds of the borrower. While this traditional mortgage loan was once the “standard” loan for homebuyers, now only about 50% of mortgages originated are of the traditional 20% down, 80% financed variety. This is especially true for first-time home buyers, who frequently do not have the 20% down payment available.
What are the options when you do not have the 20% down payment the traditional loan requires?
PMI: One option is a loan with what is known as PMI, short for Private Mortgage Insurance. Private mortgage insurance essentially insures the lender against a loss due to having less than the standard 20% down payment. There is a separate company that provides the PMI insurance, for a monthly fee or for an upfront fee. There is a separate approval required for the PMI, and the PMI reviews the borrowers’ credit history and income. The premium charged to the borrower for the PMI is determined by the loan amount and credit profile of the borrower. The borrower can cancel the PMI payment once the equity in the home reaches 20%, based on the original appraised value. Even with PMI, a minimum 5% down payment is still required.
FHA Loan: Another very common option for homebuyers is a loan guaranteed by the US Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA). These are commonly referred to as FHA loans, and only generally require a minimum of 3.5% down payment. In addition, FHA loans usually have more relaxed underwriting standards than a loan insured by a traditional PMI company, such as requiring lower credit scores. However, FHA loans do require that the buyers use the premises as their principal residence. There is no maximum income limit for an FHA loan. However, there is a maximum loan amount, as discussed in a prior blog post (Mortgage Loan Limits for 2018). The FHA loans also have a version of PMI, in which there is both an upfront premium and a monthly premium, both of which are based on the loan amount. With an FHA loan, the mortgage insurance payment continues for the life of the loan, although the monthly premium slowly declines as the loan is paid down.
VA Loan: If you are a veteran, another option is a VA loan. Although similar to an FHA loan, a VA loan allows for 100% financing of the purchase price. In addition, there is no monthly mortgage insurance on a VA loan, although there is an initial loan fee paid at closing. Like an FHA loan, a VA loan requires occupancy of the premises as your primary residence.
Gift of Down Payment: Another option for some buyers is to get a gift from a family member for the down payment. The lender will have certain requirements for using a gift, including a gift letter from the person making the gift confirming that it is a true gift and not a loan.
Some lenders also offer other options for low down payment loans, some with no PMI, some tailored to first time home buyers and some designed for borrowers with very strong credit or income profiles. You can find out about these programs by contacting the individual lender.
What is best option for you? The only way to answer that is for you to speak with a qualified mortgage lender or broker and determine which options work the best for your particular situation. The prospective lender will need to review your credit and income profile as well as potential purchase price of your new home.