No need to feel discouraged if you lack the recommended minimum down payment of 20 percent, experts say. Qualifying for a low down-payment loan can be challenging, but there are more available options than people think.
“Despite the real estate collapse and related issues, lenders and mortgage insurance companies, along with Fannie Mae and Freddie Mac, have been allowing lower down payments on loans that are carefully underwritten,” says Daniel Briand, senior vice president and retail lending manager for BayCoast Bank in Swansea, Mass.
A 20-percent down payment is typical, but it is not practical for many buyers who have felt the financial pinch from the prolonged economic downturn. This reality means that “programs are needed to match qualified buyers with the homes they can afford to own,” says Aaron Roberts, mortgage consultant with Envision Mortgage Corporation in Wilmington, S.C.
Several government programs are currently available. FHA loans are geared toward first-time buyers, USDA loans are for rural housing and VA loans are available for veterans. The former requires as little as 3.5 percent down, while the latter two offer 100-percent financing with no money down. Fannie Mae’s HomePath program only requires a 3-percent down payment.
Besides these loan programs, “The federal government has encouraged [private] lenders to be less restrictive in lending practices,” Roberts says. Still, it’s the high demand for these loans that has encouraged lenders to offer more low down-payment options.
Conventional conforming loans can also be had for less than 20 percent down, provided you pay private mortgage insurance (PMI) premiums. PMI is usually required for all loans financed at over 80 percent of the purchase price and is typically calculated at around 1.25 percent of the loan amount. Briand says a $200,000 home purchased with 10 percent down would trigger PMI premiums as low as $66 per month, assuming you have a high credit score.
Donald Edward Tepper, real estate agent with Long and Foster Real Estate in Burke, Va., recommends consulting with a trusted lender or mortgage broker. Be prepared, however, to have your ducks in a row.
Lenders may require high minimum credit scores for these loans – “the higher, the better,” Tepper says. “They also need two years of tax returns and verification of employment, especially longer-term, secure employment.”
Lenders will likely want to see three years clear of major credit issues, such as bankruptcy or foreclosure. Borrowers will need to be current on monthly payment obligations, and any judgments, charge-offs and collections must be cleared up.
Most lenders also require a one-year satisfactory rental or mortgage payment history.
“If the borrower can document these items and has [a high] median credit score, then a low down-payment mortgage should be attainable,” Roberts says.
The mortgage industry is awaiting final rules for mortgages as defined in the Dodd-Frank Act. New rules will go into effect January 2014, but industry experts predict lenders will begin changing their practices to accommodate the change.
Currently, proposed new rules would require that some mortgages have a maximum loan-to-value of 80 percent, which means 20 percent would be a required down payment.
Loans that do not meet that requirement could not be sold on the secondary loan market and would open lenders up to more liability. Simply speaking, “It will be riskier and less appealing for financial institutions to make or hold these types of loans in their portfolios,” Briand says.
If the rule were implemented, pricing on low down-payment loans would likely increase and availability would decrease. Still, the rule has not been finalized yet, and industry groups are offering arguments for and against it.
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