Do LOW downpayment and NO downpayment loans still exist?
Here are five types of loans, especially useful to (a) first-time buyers and (b) buyers who are planning to occupy the home. Typically, these loans are not for investors, speculators, and “second home” purchasers. Let’s base our comparison on a $250,000 purchase at 4% interest on a 30 year fixed rate loan.
1. USDA loans. No money down. Say what? No money down! But there’s a catch. You knew that didn’t you? USDA loan are available to purchase properties in “rural” areas. That works just fine for CJ and me because almost every home in our bucolic Nevada County qualifies for USDA loans. And get this, the seller can pay almost all of the closing costs! These loans require mortgage insurance (2% upfront) which can usually be rolled into the loan principal. Then, add a tiny recurring mortgage insurance premium (about .3%).
The bottom line? Your monthly PITI (principal+interest+taxes+insurance) = $1621.
2. VA loans. No money down. The catch? You have to be a veteran. Like USDA loans, there is an upfront mortgage insurance payment, 2.15% at the time of this blog, but no recurring mortgage insurance payment. Seller can pay practically all closing costs! I bought my first home with a VA loan. I love ‘em.
Bottom line? Your monthly PITI = $1559.
3. FHA loans. You have to have a little cash for FHA loans. How much? It’s 3.5% of the purchase price, but that is still low, low, low. On our $250,000 purchase the down payment you will need $8750 plus some closing costs. But, again, the seller is allowed to pay most of the closing costs. And . . . the downpayment can be a gift from rich uncle Bob.
Bottom line? Your monthly PITI = $1736
4. 95% Lender Paid Mortgage Insurance Loans. This will take 5% downpayment, or $12,500 plus closing costs. There is no upfront mortgage insurance (the lender pays it) and no recurring mortgage insurance. Yep, you guessed it, the seller can pay most of the closing costs. There are two catches with this loan. First, you actually have to have the down payment, no gifts from rich uncle Bob. Second, you are going to get a higher interest rate, probably a half per cent, or 4.5% up from 4.0% under this scenario. It’s still a great loan.
Bottom line? Your monthly PITI = $1543
5. Special Buyer Assistance Loans. This is a class of loans that can vary from state to state and even from county to county. Most of these programs are designed to help first-time buyers get into their own home. (What is the definition of a first-time buyer? Typically it means someone who has not owned a home in the past 3 years, or 5 years, or whatever the specific loan requires. Many “first time” buyers are former owners who lost their homes during the tidal wave of foreclosures. Now, having repaired their credit and served their penalty time “on the bench,” they are ready to resume home ownership.) These special assistance programs often function as “silent” second mortgages. They can be combined with another loan to provide additional funds for the downpayment. If you are short of cash, but can afford the PITI, be sure to ask your trusted mortgage lender about special assistance programs. In California, one of the most-used program is called CHDAP. Here is the definition from the California Housing Finance Agency:
“The CHDAP provides a deferred-payment junior loan – up to 3% of the purchase price, or appraised value, whichever is less, to be used for their down payment and/or closing costs. This program may be combined with a CalHFA or non-CalHFA, first mortgage loan.”
So there you have it, a variety of ways to get into a home with very little cash. You still have to qualify for the mortgage by other criteria, of course, and each program will come with its own specific requirements. Let me boil down these other requirement to their essence. Even if you don’t have much money, you will still need:
a. steady job or regular income of some kind
b. acceptable income to debt ratio
c. reasonable FICO credit score
Let me conclude with these two remarks about FICO credit scores. First, the lower your credit score, the higher the interest rate you will be charged for the loan. Conversely, the higher your FICO score, the lowerthe interest rate you will receive. Second, credit scores can be repaired or improved. I know people who can advise you how to do this. Call me.
(Thanks to Steve Longacre from Northern California Mortgage Company who provided the data)
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