The U.S housing market is mending. With mortgage rates still south of 4 percent, the monthly carrying costs for owning a home rival 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 2012, 73% of U.S. home buyers made a downpayment 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 agent should know to help eliminate one of the top worries of today’s buyer prospects:
1. For home buyers with a down payment less than 20%
Putting less than 20 percent down on a home doesn’t relegate buyers to paying for potentially costly private mortgage insurance (PMI) — it hasn’t in more than a decade. This is because banks offer loans known as “second mortgages”, or junior liens.
A second mortgage is what its name implies. It’s a second loan made at the time of closing — often for a relatively small amount — which extends a buyer’s indebtedness.
As an example, a buyer with a fifteen percent down payment may give a first mortgage to the lender for 80 percent of the home’s purchase price; and also a second mortgage to the bank for 5 percent. Together, these loans finance 85% of the purchase price, with the buyer bringing 15% to closing.
Second mortgages are typically available in two varieties — a fixed-rate option known as a Home Equity Loan (HELOAN) and an interest-only, adjustable-rate option known as a Home Equity Line of Credit (HELOC). Home Equity Line of Credits are more common and are typically tied to Prime Rate, which is currently 3.25%.
In today’s mortgage market, buyers can find second mortgage financing for up to 90% of their home’s purchase price.
2. For home buyers with a down payment of less than 10%
For buyers with a down payment of less than 10 percent, the choice for a home loan gets more tricky. Yes, conventional financing is available via Fannie Mae and Freddie Mac to 95% loan-to-value (LTV), however, loans insured by the Federal Housing Administration (FHA) are a viable option as well.
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. 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 is relatively high, requiring an upfront 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).
Furthermore, unlike conventional mortgage insurance, beginning June 3, 2013, some FHA loans will require that annual mortgage insurance be paid for as long as the loan is “active”. Conventional mortgage insurance typically ends once a home’s LTV reaches 80%.
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.
3. For home buyers with 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 product.
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, and home buyer counseling is not required. It’s often less costly as compared to FHA financing, too, as a result of less-expensive 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, regardless of whether the property is in a designated ”high-cost area” such as San Francisco, California; Potomac, Maryland; and any one of New York City’s five boroughs.
The Conventional 97 program is valid for primary residences only.
4. For home buyers with A down payment Of 0%
Lastly, for qualified buyers, 100% financing programs remain available. These products are typically government-backed, and require that buyers meet some secondary standards beyond the typical mortgage underwriting guidelines, like special classes or counseling.
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. Both are previewed below.
VA Home Loans
VA home loans are available to qualified military personnel exclusively. Loans are available for up to 100% of a home’s purchase price, and have no 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
USDA mortgages make available 100% financing, too. To qualify, the subject home must be within a pre-approved USDA census tract, which includes many U.S. suburbs and exurbs; and the buyer must earn an income which does not exceed local norms. The USDA charges a small, annual 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.
Lending hurdles aren’t as high as your clients think
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 lending expert to help match buyers with the programs that best suit their needs best.
As the housing market expands via both first-time and repeat buyers, demand for homes will increase. Knowing today’s financing options can go along way toward converting your on- and offline real estate leads.