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Know Your Down Payment Options: From 0% to 20%+

October 5, 2019 /

Coming up with enough cash for a down payment when buying a house is the single biggest roadblock for many hopeful home buyers.

But how much do buyers really need?

What is a down payment?

In real estate, a down payment is the amount of cash you put towards the purchase of home.

It is deducted from the total amount of your mortgage and represents the beginning equity — your ownership stake — in a house and property.

Down Payment Options

Many borrowers still believe that 20% is the minimum…and that’s just not the case.  There are options from 0% to 20%+ that can work for many would-be buyers.

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

  • FHA Loan: 3.5% down payment minimum
  • VA Loan: No down payment required
  • HomeReady/Home Possible Conventional Loan (with PMI): 3%
  • Conventional Loan (with PMI): 5%
  • Conventional Loan (without PMI): 20% minimum
  • USDA Loan: No Down Payment required
  • Jumbo Loan: 10% down

PMI is “private mortgage insurance…and you can find out more about that here…

Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.

Benefits of a larger down payment

Conventional loans without mortgage insurance require a 20% down payment. That’s $60,000 on a $300,000 home, for example. There are a number of benefits to bringing in 20%:

  • No mortgage insurance
  • Lower interest rate, in most cases
  • More equity in your home
  • A lower monthly payment

As a reminder, the down payment is not the only upfront money you have to deal with. There are loan closing costs (you can find out more about those here…) and earnest money to consider as well. Before the dramatic music returns, let’s explore some lower down payment options.

Benefits of a smaller down payment

From Dan Green at The Mortgage Reports:

“A large down payment helps you afford more house with the same payment. In the example below, the buyer wants to spend no more than $1,000 a month for principal, interest, and mortgage insurance (when required).

Here’s how much house this home buyer can purchase at a 4 percent mortgage rate. The home price varies with the amount the buyer puts down.”

Even though a large down payment can help you afford more, by no means should home buyers use their last dollar to stretch their down payment level.

A down payment will lower your rate of return

“The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.

That down payment affected your rate of return.

  • With 20% down on the home — $80,000 –your rate of return is 25%
  • With 3% down on the home — $12,000 — your rate of return is 167%

That’s a huge difference.

However! We must also consider the higher mortgage rate plus mandatory private mortgage insurance which accompanies a conventional 97% LTV loan like this. Low-down-payment loans can cost more each month.

Assuming a 175 basis point (1.75%) bump from rate and PMI combined, then, and ignoring the homeowner’s tax-deductibility, we find that a low-down-payment homeowner pays an extra $6,780 per year to live in its home.”

Once you make your down payment, it’s tougher to get that money back

More from Green: “when you’re buying a home, there are other down payment considerations, too.

Namely, once you make a down payment, you can’t get access to those monies without an effort.

This is because, at the time of purchase, whatever down payment you make on the home gets converted immediately from cash into a different type of asset known as home equity.

Home equity is the monetary difference between what your home is worth on paper, and what is owed on it to the bank.

Unlike cash, home equity is an “illiquid asset”, which means that it can’t be readily accessed or spent.

All things equal, it’s better to hold liquid assets as an investor as compared to illiquid assets. In case of an emergency, you can use your liquid assets to relieve some of the pressure.

It’s among the reasons why conservative investors prefer making as small of a down payment as possible.”

In Conclusion

As you can see, there are a wide variety of down payment options for buyers.  Please feel to contact me to go over those choices, as it would be my pleasure to help you in financing your next home.

Using Gift Money for Your Down Payment

July 27, 2019 /

Saving for a down payment can be one of the most important and most challenging facets of buying a home. The larger the down payment, the lower your loan amount – and that results in a lower monthly payment, a lower interest rate in many cases, and it could help you to avoid mortgage insurance. 

But, there are some out there that can get around bringing in a large down payment. Many have family members or others who are willing to help them out – and that’s when “gifting” comes into play.

The Gift Letter

Borrowers can get help from parents or other people that care about them, but they will need to get a signed statement from that giver that the money is, in fact, a gift and not a third-party loan.

The mortgage gift letter must include the giver’s name, address and contact information, as well as the banking information of that particular account, as well as the recipient’s name and relationships to the giver and the dollar amount.

In most cases the lender will have a template letter that will help you with this step.

A Key Piece – Documenting the Gift

When putting together the gift letter, the giver needs to include documentation of where that gift is coming from – this is extremely important

For instance, the lender will most likely need to see a bank statement or other form of proof verifying that the donor has the money to provide that gift and/or paperwork showing an electronic transfer between the donor’s account and yours.

If the person gifting the funds is selling shares of stock or other investments to provide the cash for a down payment, the giver will need a statement from their brokerage account showing that transaction.

Most importantly, as a borrower, you don’t want to add the gift funds with any of your other finances. Doing so could complicate the paper trail and cause the lender to reject the gift altogether. 

It’s easiest to have the giver wire the money straight to escrow at closing – that way there are no issues with documenting the gift.

Rules and Limits On Gifts

You might assume that you can just use whatever financial gifts your loved ones give you for a down payment, but using gift money is not as simple as you might think. The source of the funds in your bank account, and the givers, will matter just as much as how much money you actually have.

Secondly, the amount of down payment funds that can be gifted depends on the type of mortgage loan involved. If you’re getting an FHA loan with a 3.5% down payment, for instance, the entire down payment can be a gift.

On the other hand, if you’re using a conventional Fannie Mae or Freddie Mac loan, the entire down payment can only be a gift if you’re putting down 20% or more of the home’s purchase price. If your down payment is less than 20%, some of the money has to come from the borrower. 

These rules are subject to change based on lending regulations, so check with your mortgage lender to make sure that you transaction qualifies for the use of gift funds.

Primary Residences

If a borrower is purchasing a primary residence, they can use gift funds for their down payment. These following regulations apply:

  • If it’s a single-family home, you can use gift funds without having to contribute any of your own money to your down payment.
  • If it’s a multi-family home, you can get a home without having to contribute to the down payment as long as the down payment is 20% or more. If the down payment is 20% or less on a multi-unit home, you have to contribute at least 5% of your own funds to your down payment.

Second Homes

For a second home purchase, the following regulations apply regarding gifts and gift limits:

  • If you’re making a down payment of 20% or more, all funding for the down payment can come from the gift.
  • If it’s less than 20%, then 5% of your down payment must come from your own funds.

Investment Properties

Gift funds cannot be used toward the down payment on any investment property.

Who Can Gift a Down Payment?

Depending on the type of loan, there are different regulations on who may give a down payment gift.

Conventional Loans (Fannie Mae/Freddie Mac)

A conventional loan through Fannie Mae or Freddie Mac means the gift must to come from a family member. Per their regulations, family is defined as:

  • Spouse
  • Parent (including step and foster)
  • Grandparent (including great, step and foster)
  • Aunt/uncle (including great and step)
  • Niece/nephew (including step)
  • Cousin (including step and adopted)
  • In-laws (including parents, grandparents, aunt/uncle, brother- and sister-in-law)
  • Child (including step, foster and adopted)
  • Sibling (including step, foster and adopted)
  • Domestic partner
  • Fiancé

FHA Loans

With FHA loans, the list is nearly identical to the conventional rules, including future in-laws. But, some restrictions do apply – so do check with your lender for details.

While cousins, nieces and nephews aren’t able to give your gift under normal family guidelines with an FHA loan, the FHA does allow for gifts from close friends who have a clear interest in your life. This can include extended family like cousins, nieces and nephews and even former spouses.

In addition to the ‘close friend’ guideline, the FHA also allows for gifts from the following:

  • Employer
  • Labor union
  • Charitable organization

Finally, you can receive funds from a government agency or public entity that provides homeownership assistance to low-to-moderate income or first-time home buyers.

In Conclusion

Please reach out to me for more information on gifts and mortgage qualification, as it would be my pleasure to help you!

Before Making a 20% Mortgage Down Payment, Do Read This

March 2, 2019 /

“How much should I put down on a house?”

It’s a question that I hear all the time from would-be home buyers— especially first-timer purchasers.

And, the answer is:  “it depends,” as it really will vary by buyer.

I’d highly recommend that you check out Dan Green’s article at The Mortgage Reports for more.

Per Mr. Green: “If you’re a home buyer with a good deal of cash saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, your loan size shrinks, reducing the size of your monthly payment.”

Or, perhaps your situation is reversed.

“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”

Dan continues: “One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually true.”

“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.

Larger Down Payments Actually Increase Risk

Green continues: “As a homeowner, it’s likely that your home will be the largest balance sheet asset. Your home may be worth more than all of your other investments combined, even.

In this way, your home is both a shelter and an investment and should be treated as such. And, once we view our home as an investment, it can guide the decisions we make about our money.

The riskiest decision we can make when purchasing a new home?

Making too big of a down payment.”

The Higher The Down Payment, The Lower Your Rate of Return

The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.

That down payment affected your rate of return.

  • With 20% down on the home — $80,000 –your rate of return is 25%
  • With 3% down on the home — $12,000 — your rate of return is 167%

That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!

FHA and Conventional Mortgage Options – Which is Better?

October 21, 2018 /

I’m often asked about the different types of loans available for those with a limited down payment.  The main options are Fannie Mae and Freddie Mac conventional mortgages or FHA loans.  But which one is best?

The FHA versus conventional analysis involves taking a look at your credit score, your available down payment, and your long-term financial goals.

Let’s take a look at all 3 issues:

1. Credit score – buyers with low-to-average credit scores may be better off with an FHA loan. FHA mortgage rates are generally slightly lower than conventional ones for applicants with lower credit, and FHA loans allow credit scores down to 580.

2. Down payment – borrowers can come in with a lower down payment with conventional products, at just 3% down. FHA requires 3.5% percent down.

3. Long-term goals – conventional mortgage insurance can be cancelled when the home achieves 20% equity. FHA mortgage insurance is payable for the life of the loan and can only be canceled with a refinance. Buyers who plan to stay in the home five to ten years may opt for conventional, as the FHA mortgage insurance can add up over time.

For a more, I’d invite you to visit the source at The Mortgage Reports and Dan Green’s post.

FHA Or Conventional – Which is Superior?

There are a multitude of low-down payment options for today’s home buyers but most will choose between the FHA 3.5% down payment program and conventional options such as HomeReady, Home Possible, and Conventional 97.

So, which loan is better? That will depend on your circumstance.

For example, in deciding between an FHA loan and a conventional option, the borrower’s individual credit score matters greatly. This is because the credit score determines whether the borrower is program-eligible; and, it affects the monthly mortgage payment, too.

FHA loans are available with credit scores of 580 or better. The conventional options, by contrast, require a minimum credit score of 620.

Therefore, if your credit score is between 580 and 620, the FHA loan is essentially the only available option.

As your credit score increases, though, the conventional options become more attractive. Your mortgage rate drops due to the lower score and your mortgage insurance costs do, too. This is different from how FHA loans work.

You can find out much more about mortgage insurance here….

With an FHA loan, your mortgage rate and MIP cost the same no matter what your FICO score.

Therefore, over the long-term, borrowers with above-average credit score will typically find conventional loans more economical relative to FHA ones.

In the short-term, though, FHA loans generally win out.

A Second Thought

One main consideration has to be the length of time you would expect to “keep” this mortgage. 

Borrowers should take into consideration that FHA MIP is forever but conventional mortgage insurance goes away at 80% loan-to-value. This means that, over time, your conventional option can become a better value — especially for borrowers with high credit scores.

It’s hard to know for how long you’ll hold a loan, though. Sometimes, we expect to live in a home for the rest of our lives and then our circumstances change. Or, sometimes mortgage rates drop and we’ve given the opportunity to refinance.

As a general rule, though, in rising-value housing market, if you plan to stay in the same home with the same mortgage for longer than six years, the conventional 97 may be your better long-term fit.

One other thing to consider is upfront charges.

The FHA charges a separate mortgage insurance premium at the time of closing known as Upfront MIP. Upfront MIP costs 1.75% of your loan size, is generally added to your balance, and is non-recoverable except via the FHA Streamline Refinance.

Upfront MIP is a cost. The conventional versions do not charge a fee.

FHA vs Conventional Infographic

 

Image Courtesy of  The Mortgage Reports

You can find out much, much more about low-down payment options, as well as the specifics of these loans here.

For today’s low down payment home buyers, there are scenarios in which the FHA loan is what’s best for financing and there are others in which the conventional option is the clear winner. Rates for both products should be reviewed and evaluated.

It would be my pleasure to help you find the version that’s most optimal for your situation, so please do contact me for more details!

The Top 5 Down Payment and Mortgage Insurance Myths

August 12, 2018 /

For first-time home buyers, it can be more than overwhelming to hear all the stories from friends and colleagues about getting their first home loan.

Many times they are led to some false conclusions.

If they don’t know the real facts about the loan qualification process, it can keep them from taking the necessary steps toward owning the home they’ve been dreaming about.

Let me clear up some facts and make sure the correct information is out there.

The Top 5 Down Payment and Mortgage Insurance Myths

Number 1: Borrowers need a 20% down payment

According to the National Association of Realtors, the majority of first-time home buyers believe they need at least a 10% to 20% down payment. However, that’s simply not true with all of today’s different loan types and programs. Across the US, today’s average down payment is generally in the range of 5-10%. Even so, there are loan programs that allow as low as 3% and even a few no-down loan options.

Number 2: Mortgage Insurance (PMI or MIP) is required on all home loans with less than 20% down

Mortgage insurance is generally required by the lender when a borrower purchases a home using conventional financing with less than a 20% down payment. But there are dollar house questionmarkloan programs available that don’t require PMI. VA Loans do not require PMI, for instance. There are other loan programs with possible reduced mortgage insurance, so be sure to check in your mortgage lender to find out what might fit your particular situation.

Number 3: Mortgage Insurance is Permanent

Mortgage insurance is in place to protect the lender when there is less than 20% equity built up. Once more than 20% equity is in place, this insurance can be removed. Believe it or not, PMI will automatically be terminated when the principal balance reaches 78% of the original value. You can also request cancellation sooner in writing if your home value has increased enough (contact your lender for exact requirements and instructions).

For those with FHA loans, borrowers can refinance into a conventional loan to eliminate the insurance when your loan-to-value reaches 80%.

Number 4: Mortgage Insurance Protects the Borrower

Interestingly, many borrowers make the mistake of thinking that PMI is insurance that either protects the home or protects them if they end up in a foreclosure situation.House_key_digital

Actually, mortgage insurance is in place to protect the lender from default on the loan, which enables lenders to help more borrowers get loans. It does not provide protection for the borrower if they go into foreclosure.

Number 5: No Gifts Can Be Used for a Down Payment

It’s common for today’s U.S. buyers to receive cash down payment gifts. First-time home buyers are most likely to receive a cash gift among all buyer types, but repeat- and move-up buyers receive them, too.

The down payment gift rules are (1) the gift must be documented with a formal “gift letter”; (2) a paper trail must be shown for the gifted monies as they move from the giver’s account to the home buyer’s account; and (3) the gift may not be a loan-in-disguise. You can find out more about the specific of gifts from Dan Green at The Mortgage Reports here.

Now that you know more of the facts about down payments and mortgage insurance, let me know how I can help you begin your home ownership journey!

Tom Title Bar

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