2015 has been another strong year for U.S. housing, and 2016 is projecting to be the same. Home sales are rising, home supply is dropping, and prices are increasing in many cities and neighborhoods. Furthermore, mortgage interest rates are down. 30-year mortgage rates are below 4% nationwide and are near their lowest levels of all-time. Buyers have close to ten percent more purchasing power as compared to last year. For the majority of today’s prospective homebuyers, it’s not the monthly payment of mortgage loans; it’s the prospect of having to put 20 percent down.
Buyers are earning good incomes these days, but few have much saved in the bank. The good news is that there are a bevy of mortgage programs requiring little or no money down and they’re available to the general public, no hoops required. Want to buy a home with little or nothing down? Now you can.
Buyers in today’s U.S. housing market don’t need 20 percent down. However, many believe they do. It’s a common misconception that “20 Percent Down” is required to buy a home, and it may have true at some point in history, but certainly not since the advent of the FHA loan, which occurred in 1934. The likely reason why buyers believe a 20% down payment is required is because, with one specific mortgage type — the conventional mortgage, putting twenty percent down cancels the requirement to pay for private mortgage insurance. Private mortgage insurance is neither good nor bad, but consumers seem to abhor it. The purpose of private mortgage insurance is to protect the lender in the event of foreclosure, that’s all it’s for. However, because it costs money, private mortgage insurance gets a bad rap. It shouldn’t. Because of private mortgage insurance, homebuyers can get mortgage-approved with less than 20 percent to put down and, eventually, private mortgage insurance can get removed.
Given the rate at which homes are currently increasing in value, for example, a homebuyer with a 3% down payment loan would be done with PMI in fewer than four years. That’s hardly terrible. Yet, home buyers, especially first-time home buyers, will often delay a home purchase because they want more money saved up for down payment. Meanwhile, home prices have been climbing.
Having a large down payment should certainly be a consideration for homeownership, but it shouldn’t be your only consideration. This is because home affordability is not about how much money you can put down on a home. Home affordability is about whether you can afford the monthly payments that come with owning a home. A larger down payment will grant you a smaller loan size and, therefore, a smaller monthly mortgage payment. However, if you deplete your life savings to make that large down payment, you’re putting yourself at risk.
When the majority of your money is tied up in a home, financial experts refer to it as being “house-poor”. When you’re house-poor, there’s plenty of money “on-paper”, but none of it available for the everyday emergencies of life. And, as every homeowner will tell you, emergencies happen. A lot of people say it’s financially conservative to put 20% down on a home. However, if that 20 percent is everything you have, it could be argued that putting twenty percent down is the exact opposite of financially conservative. When you earn good income but have little saved, the financially conservative option – truly, is to make a small down payment instead. Being house-poor is no way to live.
The FHA mortgage is somewhat of a misnomer because the FHA doesn’t actually make loans. Rather, the FHA is an insurer of loans.
FHA mortgage guidelines are famous for their liberal approach to credit scores and down payments. The FHA will typically insure a home loan for borrowers with low credit scores so long as there’s a reasonable explanation for the low FICO.
The FHA allows a down payment of just 3.5 percent in all U.S. markets, with the exception of a few FHA approved condos.
Other traits of an FHA loan include:
- Your down payment may consist entirely from “gift funds”
- Your credit score requirement is 500
- Mortgage insurance premiums are paid upfront at closing, and monthly thereafter
Furthermore, the FHA supports homeowners who have experienced recent short sales, foreclosures or bankruptcies through the agency’s Back to Work program. The FHA insures loan sizes up to $625,500 in designated “high-cost” areas nationwide. High-cost areas include Orange County, California; the Washington D.C. metro area; and, New York City’s 5 boroughs.
The VA loan is a no-money-down program available to members of the U.S. military and surviving spouses. Guaranteed by the U.S. Department of Veteran Affairs, VA loans are similar to FHA loans in that the agency guarantees repayment to lenders making loans, which means VA mortgage guidelines. VA loan qualifications are straightforward.
In general, active duty and honorably discharged service personnel are eligible for the VA program. In addition, home buyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of service members killed in the line of duty.
Some key traits of the VA loan include:
- You may use intermittent occupancy
- Bankruptcy and other derogatory credit do not immediately disqualify you
- No mortgage insurance is required
VA loans also allow for loan sizes of up to $1,094,625 in high-cost areas. This can be helpful in areas such as San Francisco, California; and Honolulu, Hawaii, which are home to U.S. military bases.
No Money Down options exists for non-military borrowers, too. The U.S. Department of Agriculture offers a 100% mortgage. The program is formally known as a Section 502 mortgage, but, more commonly, it’s called a Rural Housing Loan. The good news about the USDA Rural Housing Loan is that it’s not just a “rural loan”, it’s available to buyers in suburban neighborhoods, too. The USDA’s goal is to reach “low-to-moderate income homebuyers”, wherever they may be. Many borrowers using the USDA Single Family Housing Guaranteed Loan Program make a good living and reside in neighborhoods, which don’t meet the traditional definition of rural. For example, college towns including Christiansburg, Virginia; State College, Pennsylvania; and even suburbs of Columbus, Ohio meet USDA eligibility standards. So do the less-populated suburbs of some major U.S. cities. Some key traits of the USDA loan include:
- You may include eligible home repairs and improvements in your loan size
- There is maximum home purchase price
- Guarantee fee added to loan balance at closing; mortgage insurance collected monthly
Another key benefit is that USDA mortgage rates are often lower than rates for comparable, low- or no-down payment mortgages. Financing a home via the USDA can be the lowest cost means of homeownership.
Not everyone will be eligible for today’s low-down payment loans, which is okay. The next-lowest down payment loan comes from Fannie Mae and Freddie Mac and it requires just five percent down. That’s a good low-down payment option, too.
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