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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

A Great New Zero Down Payment Option – The Chenoa Fund

May 3, 2018 /

Photo: Flickr/Jake Rustenhoven, (gotcredit.com)

Choosing the right loan type is an important part of home buying. There are many different mortgage options available, and each comes with its own set of benefits – including a zero down payment loan option.

Making a good decision about your down-payment is one of the key aspects getting the most value from your home purchase.

The amount you put down will play a large role in your monthly payments, your mortgage rate, and how much home you can qualify for.

For some buyers, making a large down payment makes sense. For others, there are options that require little or no down payment. There is no “good” or “bad” down payment amount. It depends on the buyer’s situation and long-term goals.

For more, check out The Mortgage Reports and Tim Lucas’ article here….

The Chenoa Fund – A Great No-Down Option

100% Home Financing

The Chenoa Fund provides first mortgages to any borrower meeting minimum credit standards. This is not a narrow, limited program for which only a select few borrowers can qualify. There is no first-time home-buyer, income or geographic restrictions or recapture provisions with this particular program.

Borrowers who qualify for a first mortgage may also receive assistance with their down payment.

Second Mortgages

Under FHA guidelines, Chenoa Fund is qualified to provide borrowers with grants or second mortgages to cover the borrower’s 3.5% minimum contribution (down-payment), with rates as low as 0% to help in qualifying.

Borrowers qualifying for an FHA first mortgage through Chenoa Fund can obtain a grant or second mortgage if they have at least a 640 credit score, a 43% debt-to-income ratio, and meet other qualification guidelines.

Contact me for more details…

Other Zero-Down Options

USDA Loans

USDA loans could be the right choice for those who want a home in a suburban or rural area. Find out more here…

The United States Department of Agriculture (USDA) backs this loan in an effort to promote home-ownership and economic development in less-dense areas.

But don’t let the word “rural” concern you, as its definition is quite generous, per the USDA. Many suburban areas just outside of major metro centers are within USDA home loan boundaries.

USDA loans offer 100 percent financing, so the buyer doesn’t need to put any money down on their home if they don’t want to.

VA Loans

Another popular zero-down loan program is the VA loan. The U.S. Department of Veterans Affairs (VA) offers this loan program to active military members and veterans of the U.S. armed forces.

VA loans also carry the lowest mortgage rates of any loan type, typically around 0.25% below rates for conventional loans – and no mortgage insurance is required!

Also, a VA loan can be extraordinarily flexible. Lenders allow credit scores down to 620 or lower thanks to strong government backing and the VA utilizes a different debt-to-income calculation. VA loans were created to make home-ownership accessible and affordable for military members and veterans.

Options Between 3% and 5% Down

3% Down Conventional

Fannie Mae and Freddie Mac both have low down-payment options where the home-buyer needs only 3% down, making the loan-to-value (LTV) ratio 97. This mortgage option generally requires a credit score of at least 620.

This loan requires private mortgage insurance, but depending on your credit score, the mortgage insurance could be less expensive than that of FHA.

Those looking to keep the home and loan long term might opt for this loan; mortgage insurance automatically drops off when you build 22% equity in the home. FHA mortgage insurance remains for the life of the loan. Also, homeowners must refinance to cancel FHA mortgage insurance.

Because conventional PMI can be cancelled, buyers often opt for it, even when it is more expensive than FHA mortgage insurance.

3.5% Down FHA Loan

One of the most popular low down-payment options is the FHA loan. These mortgages are backed by the Federal Housing Administration (FHA) and require a credit score of just 580 and a down-payment as little as 3.5%.

FHA loans require a monthly mortgage insurance premium (MIP) payment. This is FHA’s “brand” of mortgage insurance and serves the same purpose as private mortgage insurance (PMI) on conventional loans. While mortgage insurance of any type means extra cost, it also means the buyer can put less money down and buy a home sooner.

Low down-payments are not the only reason FHA loans are popular.  Because of their lenient credit requirements, debt-to-income ratios, and low down-payment, many home buyers will find that an FHA loan works best for them.

The Next Step

Make sure you find out more by contacting your local mortgage professional and working on pre-qualification. It would be my pleasure to do just that!

February 4, 2018 /

Use Your Tax Return as a Down Payment

While most people dread tax time, if you are getting a tax refund, this time of year can seem almost as rewarding as end-of-the-year bonus season.

Whether you are receiving a refund of a few hundred dollars or several thousand dollars, if you’re contemplating buying your first home, you may want to deposit your refund into an account dedicated to your down payment fund.

Coming up with a down payment to buy a home is one of the biggest obstacles that renters and first-time buyers stumble on when they want to become homeowners. That’s why during tax season, many first-time homebuyers turn to their tax refunds as a down payment option.

With that said, there may be no better time to qualify for a new home!  Please do contact me at your earliest convenience and we can get started.

Quite often a tax refund may actually cover the whole down payment on a home purchase.  Furthermore, these tax refunds may be used as assets or down payment right away.

Can I Apply Now for a Mortgage Even Though I Do Not Have my Refund Yet?

It is perfectly fine to apply for a mortgage loan when you don’t have your refund yet.  At application we can just assume the amount that you will be receiving.  As long as we can prove receipt of the funds in your account prior to the final underwriting approval.

Pay closing costs or earnest funds

Many first time home buyers underestimate the cost of buying a home. In addition to a down payment and enough money to rent a moving truck, you may need to pay closing costs or pay an earnest deposit (money paid to the seller as evidence of your intention to purchase the property).

Buy down your interest rate

Paying a small amount of money up front can save you tens of thousands of dollars in interest over the life of the loan. One point – or one percent of your loan – generally buys you a discount of one eighth (.125) or up to one quarter (.25) of a percent. Meaning, you could move your monthly payment and interest rate downward (from say, 4.5% to 4.25%) by bringing in some cash.

How to Handle Your Tax Refund

If you plan to use your tax refund for a down payment, you have to follow very strict procedures. If you miss a step, a lender might not be able to use the funds. They have to have a paper trail.

In order to have a trail, you have to deposit the refund in the account you plan to use for your down payment. If this is your checking account, then deposit the entire check in this account. You should not deposit a part of the check and take cash the rest. You should also not deposit it and then withdraw it as cash. Essentially, deposit it and leave it alone.

Down Payment Strategies for First-Time Home Buyers

December 18, 2017 /

For many would-be buyers, the down payment is the only thing keeping them from owning a home. Most have a good paying and consistent job – some are even working to pay down debt.

Right now, mortgage rates are remarkably low, home prices have been increasing steadily, and rental rates are getting out-of-hand. 

With that said, it’s always best to first reach out to an experienced lender to find out more about the different options available.

Here’s a link to a great NerdWallet article from Hal Bundrick that outlines some strategies to break down this home buying barrier.

It doesn’t always take 20% down

If you’re a first-time home buyer, the down payment hurdle you have to clear may be quite a bit lower than you think. Traditionally, lenders have asked for 20% down, but there are many, many low down payment options are available, especially to first-time buyers.

Mortgages guaranteed by the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture can be “no-to-low” down payment loans.

In fact, mortgages backed by the VA and the USDA — for those who qualify — usually don’t require a down payment at all. A funding fee is charged on VA loans, but even that can be rolled into your monthly loan payment.

FHA-backed loans are available with as little as 3.5% down. With that said, buyers will have to pay mortgage insurance to help lenders defray the costs of loans that default.

Conventional loans, which aren’t backed by the government, also offer low down payment programs to first-time buyers. In, fact, down payments of just 3% are common, especially if you are a first-time buyer.  Again, buyers really should reach out to lenders that understand these programs and how they work.

Find out more here:…Know Your Down Payment Options: From 0% to 20%

Family down payment gifts

Getting help from family members might be another way to go.

If you’re getting a cash gift for down payment, you’ll want to be sure that you “receive” your cash gift properly. Should you receive your gift improperly, your lender is likely to reject your home loan application.

It’s imperative, therefore, that you follow the rules of cash-gifting for a home.

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. Home buyers are permitted to accept up to 6% of a home’s purchase price in the form of a cash down payment gift.

Using retirement accounts

If you have a retirement funds set aside, you should be able to tap a portion of it to help with the down payment. Employer-sponsored 401(k) plans often allow for penalty-free hardship withdrawals or loans.

One option used by many with a 401k is to take out a loan. Generally, your loan can be up to $50,000 or half the value of the account, whichever is less. As long as you can handle the payments (and yes, you have to pay back this loan), this is usually a less expensive option than a straight withdrawal. Though you will pay interest, you won’t pay taxes or penalties on the loan amount.

Contact your 401(k) plan administrator to find out more.

A few things to know about 401k loans:

  • Since you’re incurring debt and will need to make monthly payments on the loan, your ability to get a mortgage may be affected.
  • The interest rate on 401k loans is generally about two points above the prime rate. The interest you pay, however, isn’t paid to the company – it goes into your 401k account.
  • Many plans give you only five years to repay the loan. In other words, if you borrow a large amount, the payments could be substantial.
  • If you leave your company, you may be required to pay back the outstanding balance within 60 to 90 days or be forced to take it as a hardship withdrawal. This means you’ll be hit with taxes and penalties on the amount you still owe.
  • If payments are deducted from your paycheck, the principal payments will not be taxed but the interest payments will. Since you’ll be taxed again on withdrawals during retirement, the interest payments will end up being double-taxed.

State and local down payment assistance

There are programs in every state, implemented by government agencies, nonprofits, foundations and even employers. Assistance can have a geographic focus as wide as the nation or as narrow as a city — all the way to hyper-local initiatives targeted as tightly as neighborhoods, and even house by house.

Down Payment Assistance (DPA) programs are designed to make new homes affordable for low to middle income buyers.  These mortgage programs can be used whether you are a first time buyer or fifth time buyer (unless there is a state specific program that sets its own rules).

In general, it’s good to keep in mind that many of these programs are government based.  Stipulations may be placed on your purchase like, a requirement that the unit remains owner-occupied or when you decide to sell the property or you may only be able to sell it to another qualified low to moderate-income buyer. Also, the interest rates for these programs are generally higher than other options.

Programs change often; they’re funded, defunded and sometimes re-funded.

Going old-school and saving

There’s always the spend-less-than-you-earn-and-save-it strategy to building a down payment fund.

More than likely, it may take a combination of strategies to get you into a home with a decent down payment — and still have a little left over to cover those unexpected home-ownership expenses. Make sure to reach out to me for more information!

Smaller Down Payment Can Increase Your Rate of Return

February 20, 2017 /

As a homeowner, it is most likely that your home will be the largest asset on your personal balance sheet. For many, their home is worth more than all of their other assets and investments combined. What sort of down payment should a borrower put down to maximize their return?

“In this way, your home is both a shelter and an investment, and should be treated as such”, says Dan Green of The Mortgage Reports. In this way, when we view our home as investment, it can guide the decisions we make about our money, including that down payment.

Read more here from Dan at The Mortgage Reports.

The riskiest decision we can make when purchasing a new home? Making too big of a down payment.

A smaller down payment will increase your rate of return

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

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

Mr. Green uses the following analogy: “today, your home is worth $400,000. In a year, it’s worth $420,000. Irrespective of your downpayment, 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%

When you look at it in those terms, that’s a gigantic difference.  With that said, you really should contact a qualified lender to find out more.

There’s another factor that we must consider, though. Buyers must also consider the higher mortgage rate plus mandatory private mortgage insurance (PMI) which accompanies a conventional 97% loan-to-value loan like this. Low-down payment loans can cost more each month.

Green continues, “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.”

To that I say “So what?”

With three percent down, and making adjustment for rate and PMI, the rate of return on a low-down payment loan is still 280%.

The less you put down, then, the larger your potential return on investment.

Reasons for a Larger Down Payment

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.

Purchasing a condominium with conventional loan is one such scenario.

Mortgage rates for condos are approximately 12.5 basis points (0.125%) lower for loans where the loan-to-value (LTV) is 75% or less.

Putting twenty-five percent down on a condo, therefore, gets you access to lower interest rates so, if you’re putting down twenty percent, consider an additional five, too — you’ll get a lower mortgage rate.

Making a larger down payment can shrink your costs with FHA loans, too.

Under the new FHA mortgage insurance rules, when you use a 30-year fixed rate FHA mortgage and make a down payment of 3.5 percent, your FHA mortgage insurance premium (MIP) is 0.85% annually.

However, when you increase your down payment to 5 percent, FHA MIP drops to 0.80%.

Increase Liquidity With A Home Equity Line Of Credit

For some home buyers, the thought of making a small down payment is non-starter — regardless of whether it’s “conservative”; it’s too uncomfortable to put down any less.

Thankfully, there’s a way to put twenty percent down on a home and maintain a bit of liquidity. It’s via a product called the Home Equity Line of Credit (HELOC).

A Home Equity Line of Credit is a mortgage which functions similar to a credit card:

  • There is a credit line maximum
  • You only pay interest on what you borrow
  • You borrow at any time using a debit card or checks

Also similar to a credit card is that you can borrow up or pay down at any time — managing your credit is entirely up to you.

HELOCs are often used as a safety measure; for financial planning.

For example, homeowners making a twenty percent down payment on a home will put an equity line in place to use in case of emergencies. The HELOC doesn’t cost money until you’ve borrowed against it so, in effect, it’s a “free” liquidity tool for homeowners who want it.

To get a home equity line of credit, ask your mortgage lender for a quote. HELOCs are generally available for homeowners whose combined loan-to-value is 90% or less.

The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc

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