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Traditionally, the biggest obstacle to buying a home with
mortgage financing is obtaining the down payment funds.
In the past, mortgage lenders required at least 20% down.
Today, Government Insurance programs, VA Loan Guarantee Programs,
and Private Mortgage Insurance make low down payments possible.
In some instances, local and state agencies will provide down
payment assistance in the form of a loan or grant.
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Do not assume that you can obtain
a low down payment loan. Lower down payment loans may
require stricter credit and income requirements for
your application file.
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What makes low down
payment possible?
Low down payment loans are not as easy and common as they seem. Be thankful for
low down payment loans.
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Can I obtain a loan or gift for my
down payment?
Several options are available to you including some new innovative programs like
the FHA Bridal Registry. |
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What is Down Payment Assistance?
Local and state agencies may offer down payment assistance programs to help with
a down payment for your home. Warning, it takes some extra work. |
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State Housing Authorities
A list of state housing authorities. A great starting place to investigate down
payment assistance programs in your state. |
What makes low down payment possible?
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To be considered for a low down
payment loan, you generally need to have:
a.
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sufficient income to support
the monthly mortgage payment
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b.
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enough cash to cover the down payment
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c.
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sufficient cash to cover
normal closing costs and related expenses (explained
below)
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d. |
a good credit background
that indicates your payment history or "willingness
to pay" |
e. |
sufficient appraisal value,
which shows the house is at least equal to the
purchase price |
f. |
in some instances, a cash
reserve equivalent to two monthly mortgage payments |
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Closing costs, or settlement costs,
are paid when the home buyer and the seller meet to exchange
the necessary papers for the house to be legally transferred.
On the average, closing costs run approximately 2% to
3% of the house price. This percentage may vary, depending
on where you live. |
Simply put, mortgage insurance protects the mortgage lender
against financial loss if a homeowner stops making mortgage
payments. Lenders usually require insurance on low down payment
loans for protection in the event that the homeowner fails
to make his or her payments. When a homeowner fails to make
the mortgage payments, a default occurs and the home goes
into foreclosure. Both the homeowner and the mortgage insurer
lose in a foreclosure. The homeowner loses the house and all
of the money put into it. The mortgage insurer will then have
to pay the lender's claim on the defaulted loan.
For this reason, it is crucial that the family buying the
home can really afford it -- not only at the time it is purchased,
- but throughout the time period of the loan.
Although the cost of the mortgage insurance is paid by the
home buyer, or borrower, the mortgage insurer works directly
with the lender. Mortgage insurance is available to commercial
banks, savings & loans and mortgage bankers, all of whom
offer mortgage loans to home buyers.
Remember that mortgage insurance is not the same as credit
life insurance, also called mortgage life insurance. This
type of policy repays an outstanding mortgage balance upon
the death of the person who took out the insurance policy.
Down Payment Loans or Gifts
Yes, but you can not use this strategy for all loan programs.
The most popular program for this tactic is the Federal
Housing Administration or FHA. FHA allows 100% gift funds
for your down payment. The gift can be for any relative
or can be collected through new innovative programs, like
the Bridal Registry where couples receive money into a account
that can be used for the down payment.
Another popular tactic, which can be used in a wider range
of programs, is to borrow from your 401K program. If you have
a 401K program with your employer, you can withdraw without
a penalty for your downpayment and pay it back over a specified
period. There are some drawbacks, the payment will be used
in qualifying and your 401K account will not continue to grow
as fast. Even with these drawbacks, it is often a smart move
if this is your only option.
Go to Top
Down Payment Assistance
Many local and state agencies run bond programs to generate
funds to help individuals and families with a down payment.
Contrary to public thinking, these bond issues are not a type
of welfare. The government knows that it can be tough to buy
that first home, especially on a limited income.
Most agencies are income sensitive, but you may be surprised
by the high level of acceptable income. The income level is
especially high if you have children or dependents. Most agencies
also have purchase limits, but they are adjusted to the income
qualifications level.
If you are able to obtain down payment assistance, you may
receive a lower interest rate. The drawback is that it often
takes quite a bit of work with extra paperwork and mandatory
education classes. Our advice, find a realtor or mortgage
lender who is familiar with both the local and state agencies
and their policies.
Ask about our Ameri-Dream Program, and you may qualify for
a No Down Payment Loan.
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