Putting 20% down on a new home is not possible for many families. Thankfully there are low, or no down payment home loan options available to home buyers right now.
Senior Mortgage Advisor, Derek Harman was recently interviewed by Aly J. Yale for Money.com.
by Aly J. Yale for Money.com
Home Possible and Home Ready Loans
The most popular low down payment options are Home Possible Freddie Mac Conventional Loan and Home Ready Fannie Mae Conventional Loan. These two products are geared towards 1st time home buyers that have good credit, but not a lot of assets that they can put towards a large down payment or closing costs.
Home Possible and Home Ready require a 3% down payment. These usually have a better interest rate than a regular conventional purchase and also has a reduced monthly PMI rate.
There is an income limit attached to this type of loan. Previously it was 80% of the area media income, but it has just recently been increased to slightly higher than that.
FHA Program
Another popular option is our FHA Program which is geared towards borrowers with less than excellent credit. It allows a higher debt to income ratio which may increase a buyers purchase power. The FHA Program requires a 3.5% down payment. There are pros and cons with an FHA loan so a consumer will want to make sure to discuss the details of each loan program with their lender.
Low and 0% Down Payment Options
Low down payment home loan options are out there. There are specific state and city grants, and 1st time home buyer programs that allow 0% down payments and also closing cost assistance. These have specific guidelines, possible income limits, required classes and certifications in order to qualify.
Buyers interested in these programs should do plenty of research and ask questions. These programs will usually take longer for closings and will go through a more rigorous underwriting process. Make sure to explore all options and understand the immediate benefits. Compare it to the big picture and long term benefits of a more conventional approach. Specific programs meet specific needs and it’s the lenders job to explore all of those needs with each client.
Changes Due To COVID-19
Low down payment options are not becoming more scarce. It’s surprising how many people still think that having a 20% down payment is still a necessity for home ownership and that is just not true. We are constantly doing loans with 3-5-10% down payments.
NO down payment options may be a little more scarce because they are state, city or county specific programs. Some of these programs may be on hold or have pulled back due to the circumstances surrounding the virus and the current market.
“It is important to note that due to current conditions, borrowers who use down payment assistance are at a disadvantage because of extended turnaround times and stricter guidelines”, says Derek Harman, Senior Mortgage Advisor.
Private Mortgage Insurance
Good news for Private Mortgage Insurance or PMI. There are options for no PMI mortgages with less than 20% down. For instance, there are LPMI (lender paid mortgage insurance). This can come with a higher interest rate which may cost more in the long run. The borrower can pay for the PMI upfront so there is no monthly payment.
Because the market is volatile right now and interest rates may fall in a very short period of time, this may be the right time to benefit from a refinance. Borrowers that refi now may have to deal with paying off the PMI more than once, which could cost in the long run.
Derek Harman tells his borrowers to weigh all options. “See where your comfort level lies with the total monthly payment and total amount of cash to close, and go from there.”
Options For No PMI
Borrowers can also do a 1st and 2nd mortgage to avoid PMI. Usually the 2nd mortgage is a HELOC, which during these times, will have a favorable rate. There are still banks and credit unions doing 2nd mortgage piggyback loans for this purpose.
On the 2nd mortgage note, there are many companies out there right now with investors that have pulled back pricing on high balance loans. A high balance loan in the DC, MD and VA area is anything over $510,400-$765,600.
Basically, competitive interest rates or “market rates” may not be available. A lot of this has to do with the enormous volume of loans that everyone is taking on with the historically low interest rates at this time. “While this is being leveled out, it may benefit someone with a high balance loan to break it up into a 1st and 2nd mortgage and take advantage of the low rates”, says Harman.
Talk To Your Advisor
Home Possible and Home Ready conventional loans are right for borrowers with 700 + credit score. They require a 3% down payment with current rates at all time lows.
Borrowers with credit scores in the 640-660 range can benefit from an FHA loan. The idea is to strategically improve your credit within a year or 2. Then, refinance into a more permanent loan for long term savings.
Derek Harman
Senior Mortgage Advisor
“I truly love assisting people through this time of stress, and making the process simple and easy.”
I was born and raised in Petersburg, West Virginia, and I moved to Delaware when I was 14. I played baseball at Salisbury University, and graduated with a degree in Mass Media Communications and a minor in Psychology. I have lived in Virginia, the District of Columbia, and Maryland where I currently reside with my wife and two daughters. Having lived in these three areas, I have become familiar and fallen in love with each of their unique qualities. I have been in the finance and mortgage industry since 2011. For most people the loan process may be one of the most stressful times of their lives. I truly love assisting people through this time of stress, and making the process simple and easy.
I pride myself on customer service, professionalism, and integrity. I have surrounded myself with the best loan officers and mentors in order to become the best I can be. I look forward to meeting, and creating an opportunity to earn your trust!