How to get a low down payment mortgage

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If you’ve been longing to buy your first home, this may be the right time to move as mortgage rates are among the lowest ever.

However, you might think that you cannot afford the down payment or the closing costs. After all, many people believe that it takes 20% to buy a home. While this amount is preferable, there are many programs out there that provide financial assistance to first time home buyers and mortgages that require only 3% less.

“The biggest obstacle is the down payment,” says Malcolm Hollensteiner, director of mortgage production at Sandy Spring Bank, headquartered in Olney, Maryland. When buyers believe they need to return 20%, they may feel left out of opportunities. “If you’re not around, you might think you’ll never make it,” he says. But mortgage lenders “can unlock the treasure trove of all these programs aimed at making home loans affordable.”

From July 2019 to June 2020, 31% of people in the market for a home were first-time buyers, according to the 2021 National Association of Realtors Home Buyers and Sellers Generational Trends Report. The same percentage of first-time buyers were in the market during this period last year.

What you need to know before buying a loan:

Get prequalified

Buying your first home can be exciting, but it requires planning and a thorough understanding of your overall financial situation: What is your monthly debt-to-income ratio – is this your monthly expenditure compared to your monthly income? What does your credit report look like? Credit scores are based on data in your credit reports from the three credit bureaus: Experian, Equifax, and TransUnion. Lenders will want to know all of this to determine how much you can afford and how likely you are to pay back the loan.

The median down payment for all buyers in 2020 was 12%, according to the NAR 2021 report. For buyers between the ages of 20 and 30, the average down payment was 6%. However, it is possible to file less.

Before looking for homes online, it is a good idea to think about what you can afford. “It’s important to talk to lenders,” says Hollensteiner. “Make yourself familiar with all programs. There are many options for potential first-time buyers to finance a property. “

Lenders can provide you with a pre-approval letter before you go shopping in person. “As soon as they want to buy a house, that should be the first step, some kind of pre-approval,” he says.

Amy Goldstein, Vice President, BMIC Mortgage in Rockville, Maryland, advises prospective borrowers on the two-way principle:

  • Two years of W-2s or 1099s or two years of tax returns;
  • The last two months of bank statements to verify your assets;
  • Two pay slips that correspond to 30 days of income.

A pre-approval letter, she says, is “like a golden ticket to go and see.” Know exactly what you can afford. “You have to know what you can buy. What’s the Biggest Amount You Can Afford? Look at that amount and below. Buy a home that you can afford and not default on payments, ”she says.

Here’s a look at several programs that can help you get a low down payment mortgage:

State insured loans

These loans are available from banks, non-banks and credit unions. Check with a lender to see if they participate in government insured loans.

Loans through the Federal Housing Administration, which is part of the Housing and Urban Development Department, require a minimum down payment of 3.5%, while the average down payment on FHA loans is 4.4%. These loans are for the borrower who is ready to own a home but may not have a lot of cash on hand.

FHA loans are intended for people who have been excluded from conventional home loan requirements. According to the FHA, they either lack a credit history or have low credit ratings. Other federally insured loans include home loans from the Department of Veterans Affairs and the Department of Agriculture. With VA loans, financing of up to 100% is possible.

An FHA loan with a 3.5% minimum down payment is required to have a credit score of 580 or higher, according to the HUD. With a credit rating between 500 and 579, the borrower would be limited to a maximum loan-to-value ratio of 90% and a 10% deposit would be required. The loan-to-value ratio compares the size of your mortgage with the estimated value of your home.

FHA loans require an upfront mortgage insurance premium of 1.75% of the loan balance and 0.45% to 1.05% of the loan amount per year based on the amount borrowed, the loan-to-value ratio and the loan term.

Mortgage insurance is required for loans where the down payment is less than 20% of the property’s appraised value. “In addition to paying the regular mortgage, there is an additional cost,” said Joel Kan, vice president of economic and industry forecasting for the Mortgage Bankers Association.

The buyer “has to work harder to get equity in their home,” he adds. One possibility is to wait longer to buy and save more on the down payment. He also points out that there are maintenance costs associated with home ownership. “It’s the biggest financial decision most people will make.”

Government-sponsored corporate loans

If you have good credit scores – 680 or higher – government-sponsored corporate loans offered by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.) are an option. “These are conventional loans for people with good credit, who are employed by W-2 and who don’t have a lot of debt,” says Goldstein. “The difference between FHA and these loans is the credit score threshold.”

One example is the FannieMae97, which only requires a 3% deposit. Another type is the Freddie Mac Home Possible, which also requires at least 3% down.

Fannie Mae HomeReady and Freddie Mac Home Eligibility requirements for possible loans depend on your income and where you live.

Advance payment assistance

Some shoppers may still feel that a 3% deposit is not within their reach and may need help collecting it. For example, purchasing a $ 300,000 home through the Fannie Mae HomeReady and Freddie Mac Home Possible programs would require a $ 9,000 deposit. (The standard product Fannie Mae97 does not provide assistance with the deposit.)

Some banks like Bank of America and Sandy Spring Bank offer deposit assistance. For example, Sandy Spring Bank has the Closing the Gap Down Payment Assistance Program that can be used with Fannie Mae Home Ready and Freddie Mac Home Possible mortgages.

In the example above, borrowers may qualify to borrow the $ 9,000 down payment that will enable them to get 100 percent financing on their home purchase. “It’s important to talk to lenders,” says Hollensteiner. “Make yourself familiar with all programs. There are many options for potential first-time buyers to finance a property. “

Additionally, you could potentially get the seller to pay some or all of the closing costs or obtain lender credit to cover some or all of the closing costs, he says.

State down payment assistance programs

In addition to bank and non-bank down payment assistance, state down payment assistance programs must be taken into account. Some are grants that do not have to be paid back as long as you own your home or live in for a period of time. The most common are second mortgage loans from state and local governments with low or zero interest rates. Payments can be deferred or the loan may even be waived over time.

Down payment assistance programs are available on the HUD website in each state.

HSH.com has a database of financial assistance programs across the country. Down Payment Resource is another website that offers helpful information.

Home ownership advice

Homeownership advice can inform first-time buyers about the requirements for purchasing a home.

“Many programs require prior training,” says Hollensteiner.

“Before going to the settlement, before you sign any papers, you need to demonstrate that you have met the requirements, that you understand the responsibilities,” and potential homeownership difficulties, he says.

The aim is “to reduce the rate of foreclosures in the future and to explain what they are getting into,” says Koch.

To find a HUD-approved housing counseling center near you, call 800-569-4287. at cq or visit a list of agencies on the HUD website.

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