I still meet buyers who are wavering as to how to finance their home! The good news is that there are plenty of low down payment mortgage options that potential homeowners may consider, but deciding which of these options best fit their financial needs can be a bit more difficult. With a continuously recovering real estate market, even more of these options are becoming widely available.
Here are just a few of the current financing options available:
0% down – VA and USDA Rural Development Loans
3.5% down – FHA Loans
3% & 5% down – Conventional
Financing options like the ones mentioned above may be appealing to you as a prospective buyer, because it will allow you to afford a larger home without putting as much down up front. Unfortunately, these options can be more expensive in the long run and it’s important for you to understand so you can know what to expect in the years to come.
1. Higher Interest Rates – It’s important to realize that the mortgage industry follows a risk-based pricing system. This means that as the risk for the lender increases, the rates and fees your loan will also increase. A low down payment is a high risk for lenders, which is why FHA, VA and USDA loans apply either an upfront funding fee and/or mortgage insurance. Fannie Mae and Freddie Mac, who back up all conforming loans, will generally charge your clients a higher interest rate and/or fees when they have less than a twentypercent down payment. Depending on their credit score and other factors, rates can vary from .125% to .25% higher for a prospective buyer putting down ten percent instead of twenty-five percent.
2. Private Mortgage Insurance (PMI) – If you decide to pursue a conforming loan and plan to make a down payment of less than twenty percent, understand that private mortgage insurance comes along with it. Depending on your loan amount and credit score, you can expect to end up paying a monthly insurance fee on top of your principal and interest payment. The good news is that once a homeowner has built up enough equity to where the loan balance is eighty percent of their original purchasing price, they can finally get rid of the mortgage insurance, because it’s not as high risk for the lender. (Except for FHA loans, which does not fall off after 80%.)
In the case of our rural community of Moberly, MO, with inventory being low and demand high, you may encounter a multiple offer situation. Sellers may tend to stay away from potential buyers with low down payments, as someone with a higher down payment will usually have their loan approved faster by a lender.
Understand that having a twenty percent down payment is a definite financing advantage, but it isn’t a deal breaker, and these are tips just to be aware of when considering purchasing a home. Other tips are to check with a lender before you start looking to get pre-approved for your mortgage. Your lender will have you fill out an application (almost as much fun as doing your tax return), bring in two years’ W-2’s, bank statements, and paycheck stubs.
Another good tip: find you an experienced, full time Realtor to help guide you through the process. At Advantage Real Estate, we pride ourselves in helping make the process as smooth as possible! Happy house shopping!