Buying A House with Less Than a 20% Downpayment

Buying A House with Less Than a 20% Downpayment

There are a variety of programs designed for homeowners who want to get a mortgage but don't have a large amount of cash for a downpayment. Programs such as My Community Mortgage, VA Loans, and FHA Loans allow an individual to purchase a home with 0% down in some cases.

Before the financial crisis, the “Great Recession,” and the housing collapse, it was common and easy for a homebuyer to purchase a house with 0% down. In some cases, a homebuyer wouldn’t put anything down and would get money back upon closing, which could be used for renovations, home furnishings, or other expenses.

Since the collapse of the mortgage market, it has become common to hear that those days are over. That’s not necessarily true. Although it has gotten tougher and more expensive to purchase a home without a down payment of 20% or more, it is still possible. While 20% down or more is ideal for receiving a conventional loan, and still necessary for a jumbo loan, it is always necessary to purchase a home.

“There are various programs aimed at helping buyers without a large amount of cash to purchase a new home,” said John Shaedel from the lender National Mortgage Alliance.  “The expanded agency mortgage route offers programs such as My Community (3-5% down), HomePath, and various other First Time Buyer Assistance programs.  There is also the government route, with FHA programs (3.5% down) and special case FHA programs as well as Community Assistance down payment programs.  If someone is a veteran, there are VA loan programs (0% down).  If in a qualified area, there are USDA RHA programs (0% down).”

My Community Mortgage

My Community Mortgage is a Fannie Mae program that provides very flexible mortgage options for qualified low-income individuals. The program will finance up to 97% of a home (meaning the buyer only needs a 3% downpayment). It's available to purchase or refinance a single-family home, PUD, condominium, or a 2–4 family home. Other features of the program include:

  • Only requires a 3% downpayment from the borrower
  • Competitive rates
  • Requires PMI for downpayments of less than 20% but at a reduced rate.
  • Not just for the first-time homebuyer and can be used to refinance a mortgage.
  • Available for fixed-rate or variable rate mortgages.

Learn more about My Community Mortgage

Homepath Mortgage Program

Homepath is a program run by Fannie Mae to help sell properties that they have received in foreclosure. Properties held by Fannie Mae are listed as Homepath and buyers of those properties can purchase them  with as little as 3% down. Other features of Homepath are:

  • No need for an appraisal
  • Available for fixed-rate, variable, or interest-only loans
  • No PMI (mortgage insurance) necessary
  • Available for primary residences, second home, and investment properties (some condos are also available).

Learn more about Homepath

FHA Loans

FHA Loans are perhaps the most popular program for those who want to buy or refinance with a small downpayment. The loans allow anyone regardless of income  to purchase or refinance a home with as little as 3.5% down. While anyone can take advantage of an FHA loan, the property must be a one to four unit structure. In addition, there are limits to the loan amount, which vary depending on which state the house is located.

“The biggest drawback to an FHA Loan are the fees associated with it. FHA is charging twice the fees they did a few years ago,” said Jim O’ Malley, a Senior Loan Office at Leader Bank. Compared to a non FHA mortgage, those fees can make a significant difference. FHA loans now have a 1.25% upfront fee and 1.25% PMI fee. So, on a $200,000 mortgage, the upfront fee would cost $3,000 upfront. FHA loans are generally competitive but adding the 1.25% of PMI makes them more expensive. A 3.25% 30-year fixed rate mortgage would become 4.50% with the PMI included.

Learn more about FHA Loans

VA Loans

The government estimates that more than 27 million veterans and active duty military personnel are eligible to receive a VA loan. These loans allow qualified buyers to purchase a home with no downpayment. In general the loans are good up to $417,000, although they can vary depending on the state and geography. Other advantages of a VA Loan include:

  • No mortgage insurance (PMI).
  • Limitation on closing costs.
  • Traditional or variable mortgage loans. Buyers can choose a traditional 30 year fixed rate mortgage, or a variety of ARM options.
  • Loans can be used to buy a house, condo (must be VA approved), or co-op. Loans can also be used to build a house or refinance an existing house, condo, or co-op.

Even if a veteran received a VA loan in the past, they may still be eligible to refinance or receive a new VA loan depending on the number of entitlements remaining or if the prior loan was paid off.

Learn more about VA Loans

USDA Loans

The USDA Rural Development Single Family Housing Guaranteed Loan Program offers guaranteed loans to with no downpayment to rural homebuyers. The program partners with approved local lenders to finance 100% of the value of a house to eligible rural buyers. To quality, a buyer must purchase a home in a qualifying rural area and household income must exceed the limit established for that area. Key features of the program include:

·        100% financing, no downpayment required.

·        Individuals with “non-traditional” or lower than average credit scores may be accepted.

·        USDA offers 30 year, fixed rate loans.

·        Not limited to first time homebuyers.

·        Eligible property types include existing homes, new construction, modular homes, Planned Unit Developments (PUD’s), eligible condominiums and new manufactured homes.

Blended Mortgage

A homeowner can also use a blended mortgage to finance the purchase of a home or refinance a purchase. Common before the financial crisis, blended mortgages allow homeowners to cover part of the downpayment with a home equity loan. A common blended mortgage might be a 80-10-10.

80% - Mortgage financing

10% - financed via a home equity loan

10% - financed via cash downpayment.

In this way a buyer could finance the purchase with less than 20% down and also avoid paying mortgage insurance. Not paying mortgage insurance can save the homeowner a significant amount.

Since the fiancial crisis it has become more difficult to structure a blended mortgage. Lenders have tightened up their standards and according to Mr. O’ Maley, they want to see house and other credit payments comprise no more than 45% of a household’s total income. Blended mortgages are tough with condos.

Jumbo Mortgage Downpayment Options Limited

None of the above applied to jumbo mortgages. Buyers who need a jumbo mortgage to finance their home need to have at least 20% down or it will be very difficult or impossible to get the loan approved. And none of the programs covered above are for non-conforming (jumbo) loans.

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What are Lenders Allowed to Ask You When Applying for a Mortgage?

What are Lenders Allowed to Ask You When Applying for a Mortgage?

When you are applying for a loan, a mortgage lender can ask you about almost anything related to your finances. But there are a few questions they may try to ask that you simply don't need to answer.

Due to the collapse of the housing industry in 2008, lenders have been more careful about who they loan money to for mortgages. As a result, that means more guidelines for underwriting and more information from borrowers on applications. But regardless of the more stringent guidelines, there are still some things that lenders are not allowed to ask you. Here are some of the questions that lenders are not allowed to ask you when applying for a mortgage.

Family Status

Asking about your marital status is a little tricky. A mortgage lender is allowed to ask about your marital status, but only in a certain way. For instance, they can ask if you are married, separated or unmarried. However, they are not allowed to ask if you are single, divorced or widowed.

Similarly, mortgage lenders are not allowed to ask you if you are currently pregnant or if you are planning a family. Of course, the answer to this question could work against you if the answer is “yes” because it could affect your financial future. Lenders can only ask about your current dependents and their ages because that is information that is already available on your tax returns.

Child Support and Alimony

While a mortgage lender can ask if you are paying child support or alimony, they cannot require you to report any income that you receive from an ex-spouse. However, it is often beneficial to you if you are receiving these payments because it will put you in a better position to qualify for the mortgage loan.

Disabilities

A potential mortgage lender is not allowed to ask if you have any illnesses or disabilities when you are applying for a mortgage. This information is protected under the Americans with Disabilities Act and the Fair Housing Act.

What To Do if Asked an Illegal Question

Even though potential lenders are not allowed to ask these questions, that does not mean they are not going to pop up during an interview or application process. If this happens to you, the first thing you should do is tell the lender that you are not required to provide an answer to that question. Next, you should take the issue to the company’s manager. If the manager does not want to do anything about your complaint, you may need to take your complaint to the state’s banking commission. You can do this by filing formal complaints with the Federal Trade Commission or the Consumer Federal Protection Bureau. You should also look for a different mortgage lender that you are more comfortable with. If the lender is breaking the law during the interview process, there is a chance that they will be less than ethical when handling your mortgage.

Despite these questions that mortgage lenders cannot ask you, there are many questions left that they are allowed to ask. For instance, anything related to your income, your assets and your job is fair game. They can also ask about your current debt and your available credit. Be prepared to answer those questions and bring along any documentation and bank statements that will prove you can repay the mortgage loan if you get approved.

See the best mortgage rates where you live.

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Steps to Take Before You Begin House Hunting

Steps to Take Before You Begin House Hunting

You have made the big decision - its time to buy! However, unless you’re going to be paying cash for that house, condo or co-op, you'll need to take out a mortgage to cover the difference between your down payment and the cost of the property. But before you go house hunting, you should take some steps that can help make the process, including obtaining a mortgage at the best possible interest rate, go as smoothly as possible.

Keep those monthly payments down

Getting the best interest rate on your mortgage is really important because even a small difference in your interest rate can make a big difference in your monthly payments, especially since you’re going to be making them for many years to come. 

Great credit can help you score a great mortgage rate

The more creditworthy you are, the greater the likelihood that you will be offered a mortgage with the lowest interest rate, especially compared to someone whose credit rating may indicate, for example, delinquencies paying bills.

Credit rating agencies

To judge your creditworthiness, financial institutions review your rating from the three major credit ratings agencies, Equifax, Experian, and TransUnion.

Your credit rating is expressed numerically. The higher the number the better your credit. Most lenders will red flag applicants with credit scores below 700, so it’s important to be above this number when you’re applying for a mortgage. Even with a score above that you might not get the best possible interest rate, which lenders give only to those whom they judge to be the most like to make payments on time each and every month, so anything you can do to raise it is helpful.

Start by requesting your credit report

First, make sure your credit rating is as accurate as possible by requesting a copy of your report from each credit rating agency. Federal law mandates your right to a free credit report annually from each credit reporting agency, so you might request it, even if you’re if not applying for a mortgage in the immediate future. Then review each of these reports and if, necessary, make any corrections.

Other credit raising steps

Applying for new credits cards or having multiple inquiries made about your credit may affect your report, so try to keep these to a minimum. 

Also, large open balances on any of your credit cards may cause a loan officer to question your application, so, if possible, payoff any open balances to show that you’re up to date on all your bills.

BestCashCow.com for the best mortgage rates

Once you know your credit is in order, the best way to compare mortgage rates is to check the offerings on BestCashCow.com. That way you can easly compare interest rates from a variety of lenders, in specific zip codes. Then you can instantly find your projected monthly payment, depending on the size of the mortgage loan you’re applying for and even see the difference in payments between, for example, 15 and 30 year mortgages and fixed and adjustable rate mortgages.

Prequalification makes house hunting easier

After you’ve identified a lender, the next step is to get preapproved for a mortgage. While each lender has their own rules, in general, once you’ve been preapproved for a mortgage, which requires you to present all your documentation to the loan officer, you can go house hunting, confident in knowing how much you can borrow and what your monthly payments will be.

However, make sure you’re preapproved, not prequalified for a mortgage, since preapproval does not always require you to submit financial documentation. It’s possible that even if you’re preapproved, once you submit all the paperwork necessary to get a mortgage, you might not get the mortgage you thought you were approved for.

The next step

Now, with your preapproval letter in hand, its time to take the next step – finding that house of your dreams and financing it with best possible mortgage rate.

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