What Makes Low Down Payment Loans Possible?
Simply put,
mortgage insurance protects the mortgage company against financial loss
if a homeowner stops making mortgage payments. Mortgage companies
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
mortgage company'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 mortgage
company. 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. The Secondary Market
The
mortgage company's decision to use mortgage insurance is driven by the
requirements of investors in the mortgage market. Because of the losses
that could occur, major investors require mortgage insurance on all
loans made with low down payments. The
three primary investors in home loans are Federal National Mortgage
Association (Fannie Mae), Federal Home Loan Mortgage Corporation
(Freddie Mac) and Government National Mortgage Association (Ginnie
Mae). By purchasing and selling residential mortgages, Fannie Mae and
Freddie Mac help keep money available for homes across the country. Unlike
Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages.
It adds the guarantee of the full faith and credit of the U.S.
Government to mortgage securities issued by mortgage companies. The Two Choices: Government Insurance and Private Insurance
Now
that we have explained how mortgage insurance works and why it is
necessary, let's look at the basic kinds of mortgage insurance. Low
down payment mortgages can be insured in two ways -- through the
government or through the private sector. Mortgages backed by the
government are insured by the Federal Housing Administration (FHA), the
Department of Veterans Affairs (VA) or the Farmers Home Administration
(FmHA). Although
anyone can apply for FHA insurance, the other two government mortgage
guarantee programs are much more targeted. The VA program is limited to
qualified, eligible veterans and reservists. This program is very
specialized, so contact your mortgage professional for the details. The
FmHA insures loans for the construction and purchase of homes in rural
communities. Obtaining
conventional financing is the alternative to obtaining a home loan
backed by the government. Conventional mortgages are all home loans not
guaranteed by the government, including those guaranteed by private
mortgage insurers. Although
government and private insurance are based on the same concept of
allowing families to get into homes with less cash down, there are many
differences between the two. Often, your mortgage professional will
play an important role in suggesting and deciding which insurance is
selected. Home
buyers must make a down payment of at least 5% of a home's value to be
considered for private mortgage insurance. However, under some special
programs, the down payment requirement allows the buyer to use a gift
or grant to cover 2% of the 5% down payment required by private
mortgage insurers. The gift or grant may come from a friend, relative,
community group or other organization. Private
mortgage insurance is available on a wide variety of home loans and
there is no pre-set limit on the loan amount. Although differences such
as these may affect whether the mortgage company prefers to work with
government or conventional mortgages, your mortgage professional will
discuss which one would be better for your situation. With
the wide variety of loans available, home buyers have the freedom to
choose the type of loan that best suits their needs. Early on in the
home buying process, it is a good idea to meet with several companies
to compare the types of mortgages they offer and shop for the best
price and terms. Best of all, working with a mortgage insurer can be
very easy, whether your loan is insured by the FHA or a private
mortgage insurance company, because your mortgage professional handles
all of the arrangements. By making lending money to home buyers safer, mortgage insurance helps more families get into homes of their own.
Down Payment Loans and Gifts
Loans and gifts
can help with your down payment 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 from any relative or can be
collected through new innovative programs, like the Bridal Registry
where couples receive money into an 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 down payment 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. Down Payment - Grant That Is Never Repaid By The Homebuyer!
There are national non-profit organizations dedicated to assisting homebuyers with their down payment and closing costs. Buyers
can receive a free gift under these programs. Gift amounts vary with
each program but are generally available in amounts of 3% with some
programs, all the way up to $22,500 with others. Buyers never have to
repay these gifts. It's
easy to receive a free gift from these programs, however qualification
guidelines do vary with each program. Each program requires that buyers
must qualify for any eligible loan program with their lender (there are
many programs that qualify). While
this is the ONLY qualifying requirement of some programs, others have
requirements such as requiring that the buyer complete a Home Ownership
Counseling Course or provide 1% of their own funds into the
transaction. In addition some programs have income/asset restrictions,
recapture clauses, reserves required, or geographic boundaries. Each
program can provide you with their specific requirements and/or
limitations These
programs generally participate with FHA, Conforming, and Non-Conforming
loan products. Most of these programs do not underwrite the loan or add
any cost in the form of points, fees, etc., they simply provide the
gift for the down payment and/or closing costs. These
downpayment assistance programs can be used for Single Family (1-4
unit) homes, Manufactured/Modular Homes, Condominiums, Townhouses,
Existing or New Construction, Rehab and Non-Conforming.
Qualifying for a Low Down Payment Loan
To be considered for a low down payment loan, you generally need to have: - Sufficient income to support the monthly mortgage payment
- Enough cash to cover the down payment
- Sufficient cash to cover normal closing costs and related expenses (explained below)
- A good credit background that indicates your payment history or "willingness to pay"
- Sufficient appraisal value, which shows the house is at least equal to the purchase price
- In some instances, a cash reserve equivalent to two monthly mortgage payments
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. Closing
costs include the loan origination fee (if not already paid), points,
prepaid homeowner's insurance, appraisal fee, lawyer's fee, recording
fee, title search and insurance, tax adjustments, agent commissions,
mortgage insurance (if you are putting less than 20% down) and other
expenses. Your mortgage professional will give you a more exact
estimate of your closing costs. Points
are finance charges that are calculated at closing. Each point equals
1% of the loan amount. For example, 2 points on a $100,000 loan equals
$2,000. Companies may charge 1, 2 or 3 points in up-front costs in
addition to the down payment. The more points you pay, the lower your
interest rate will be. In some cases, you may be able to finance the
points. So How Much of a Mortgage Can You Afford?
There
are two basic formulas commonly used to determine how much of a
mortgage you can reasonably afford. These formulas are called
qualifying ratios because they estimate the amount of money you should
spend on mortgage payments in relation to your income and other
expenses. It
is important to remember that the following ratios may vary and each
application is handled on an individual basis, so the guidelines are
just that -- guidelines. There are many affordability programs, both
government and conventional, that have more lenient requirements for
low- and moderate-income families. Many
of these programs involve financial counseling for low- and
moderate-income people interested in buying a home and in return, offer
more lenient requirements. Generally
speaking, to qualify for conventional loans, housing expenses should
not exceed 26% to 28% of your gross monthly income. For FHA loans, the
ratio is 29% of gross monthly income. Monthly housing costs include the
mortgage principal, interest, taxes and insurance, often abbreviated
PITI. For example, if your annual income is $30,000, your gross monthly
income is $2,500, times 28% = $700. So you would probably qualify for a
conventional home loan that requires monthly payments of $700. Any
expenses that extend 11 months or more into the future are termed
long-term debt, such as a car loan. Total monthly costs, including PITI
and all other long-term debt, should equal no greater than 33% to 36%
of your gross monthly income for conventional loans. Using the same
example, $2,500 x 36% = $900. So the total of your monthly housing
expenses plus any long-term debts each month cannot exceed $900. For
FHA the ratio is 41%. Maximum allowable monthly housing expense
26% - 28% of gross monthly income - Conventional
29% of gross monthly income - FHA
Maximum allowable monthly housing expense and long-term debt
33% - 36% of gross monthly income - Conventional
41% of gross monthly income - FHA
One
way to determine how much to spend for housing is to compare your
monthly income with monthly long-term obligations and expenses. Use the
worksheet, "Evaluating Your Financial Resources," to determine how much
money you can spend on housing. Be sure to only include income you can
definitely count on. When
budgeting to buy a home, it is important to allow enough money for
additional expenses such as maintenance and insurance costs. If you are
purchasing an existing home, gather information such as utility cost
averages and maintenance costs from previous owners or tenants to help
you better prepare for homeownership. Homeowner's
insurance or property insurance is another cost you will have to
consider. The lending institution holding the mortgage will require
insurance in an amount sufficient to cover the loan. However, to
protect the full value of your investment, you might want to consider
purchasing insurance that provides the full replacement cost if the
home is destroyed. Some insurance only provides a fixed dollar amount
which may be insufficient to rebuild a badly damaged house.
Down Payment Assistance
The best-kept
secret behind the sustained strength of the residential real estate
market is the creation of a new pool of buyers who can afford their
mortgage payments but lack the cash for a down payment. In the past
these potential buyers had little hope of owning a home. Today,
thousands of these individuals are becoming homeowners. According
to both HUD and Minneapolis Federal Reserve, the number one barrier to
homeownership in the U.S. is the lack of downpayment money. With
President Bush's initiative to increase minority homeownership by 5.5
million by the year 2010, there is an increased need for organizations
that can provide assistance through the use of private capital. Through
the use of private capital, the non-profit down-payment industry now
makes possible over 17,000 home purchases each month for low to
moderate income buyers. Today these Downpayment Assistance Programs
(which are not just for 1st time homebuyers) are helping many people
live the dream of home ownership. These
organizations are supported through contributions made by home sellers.
The donations help to replenish the pool of funds that are used for
future buyers. Additionally the non-profits charge a small service fee,
the proceeds of which allow them to stay operational. Buyers
are provided with gifts from the non-profits, which can be used towards
their downpayment and/or closing costs. These are true gifts that do
not need to be repaid. The grants range from 2%-10% of the purchase
price of the home. Home sellers typically agree to participate because
they believe that they are receiving a fair offer for their home while
at the same time they are benefiting from making a donation to a
non-profit organization. Benefits to Home Buyers
- Get into a home
- Begin building equity
- Start taking advantage of tax benefits
- May not have to deplete their entire savings
Benefits to Home Sellers - Expose their home to a larger pool of buyers
- Typically will receive full price offers
- Sell their home faster
- Added benefit of making a donation to a non-profit
The
organizations differ slightly with some providing additional benefits
for the homebuyer. For instance the Home Downpayment Gift Foundation
has a program called "Home Mortgage Protection Plus". This Program
covers gift recipient who are enrolled in the Platinum Program against
involuntary loss of employment. Should the gift recipient(s) lose their
job during their first year of home ownership, the Foundation will
provide for up to six months of mortgage payments (maximum of $1800.00
per month in P.I.T.I.) on their behalf. The
non-profits strongly encourage Home Ownership Counseling prior to the
home purchase and some provide post-purchase counseling to its gift
recipients. The
Gift Programs generally participate with FHA, Conforming, and
Non-Conforming Loan Products. The downpayment assistance program can be
used for Single Family (1-4 unit) homes, Manufactured/Modular Homes,
Condominiums, Townhouses, Existing or New Construction, Rehab and
Non-Conforming.
While
they do not provide any lending services, they can make available local
mortgage professionals who are familiar with their Program. For more
information about these programs you can contact the Home Downpayment
Gift Foundation at 1-888-856-4600 or visit their website at www.homedownpayment.org.
State Housing and Finance Authorities
Alabama Housing Finance Authority
P.O. Box 230909
Montgomery, AL 36123-0909
(334) 244-9200
(800) 325-AHFA (2432) Alaska Housing Finance Corp.
P.O. Box 101020
Anchorage, AK 99510-1020
(907) 330-8447
(800) 478-2432 (outside Anchorage, but within Alaska)
Arizona Department of Commerce Office of Housing Development
3800 N. Central Ave., Suite 1500
Phoenix, AZ 85012-1991
(602) 280-1300
(800) 528-8421 (Toll free in Arizona)
Arkansas Development Finance Authority
100 Main Street / Suite 200
Little Rock, AR 72201
(501) 682-5900
California Housing Finance Agency
1121 L Street
Sacramento, CA 95814
(916) 322-3991
California Department of Housing & Community Development
P.O. Box 952050
Sacramento, CA 94252-2050
(916) 445-4782
Colorado Housing and Finance Authority
1981 Blake Street
Denver, CO 80202-1272
(303) 297-2432
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