There is no need to pour money into rental property when it is possible to purchase residential property with a low down payment. Home ownership gives a great sense of security and accomplishment and is a goal that many people share. Owning a home gives the opportunity for several financial benefits as well as major federal tax deductions for interest on the home loan and real estate taxes.
Making the 20 percent of the price of the house down payment that many people believe is necessary in order to purchase a home is the biggest impediment to home ownership. It is true that 20 percent is the traditional amount needed for a down payment, but with mortgage insurance, the amount can be reduced to 3.5 percent. Low down payment mortgages are becoming more and more popular especially for people buying their first home.
How it Works Lenders are willing to give mortgage loans for smaller down payments because mortgage insurance protects them in the event the borrower fails to make mortgage payments. This is why mortgage insurance is usually a prerequisite for a small down payment mortgage.
It is important that a person buying a house can afford to make the payments throughout the duration of the loan because if they default on the payments, the house will go into foreclosure. If this happened, the homeowner loses the house and all the money he or she has paid into the mortgage. The mortgage insurer loses too because they have to pay the lender’s claim on the unpaid loan.
The home buyer pays for the mortgage insurance, but the insurance company works closely with the lender to make sure all the requirements are met. The lender may be a commercial bank, a savings and loan or a mortgage banker. No matter which mortgage insurer is used, the lender will handle all the arrangements. However, the borrower has the right to ask any questions for clarification of the process.
Types of Insurance Providers
There are two types of mortgage insurance providers. One is through the government and the other is through the private sector. There are three government agencies that offer mortgage insurance including the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture’s Rural Housing Service (USDA-RHS).
Lenders may make suggestions about which type of mortgage insurance the borrower uses.
The FHA requires a minimum amount of 3.5 percent for a down payment. The loan amount will vary according to the geographical area where the house is being purchased. Anyone can apply for FHA mortgage insurance.
To meet the requirements for the VA program, applicants must be qualified, eligible veterans or reservists. To qualify for the USDA-RHS loan, the applicant must be constructing or purchasing a home in a rural community.
Private mortgage insurance does not have a pre-set limit for the amount of the loan, and there are many types of low down payment mortgage loans available.
People looking for a home loan should meet several lenders to compare the terms and conditions, so they can choose the lender that is best for their unique situation. For most people, the FHA offers the best deal.
Qualifications for a Low Down Payment Loan
The qualifications needed for a low down payment loan are basically the same as for any loan. People who would like a low down payment loan should:
1) Have enough cash to cover the down payment and closing costs
2) Have enough income to make the monthly payments
3) Have a credit history that shows willingness to repay loans. The credit score may be as low as 620 with an FHA loan
4) Have an appraisal value for the house that is equal to the purchase price
5) Have enough cash for two monthly payments
Depending on the location, closing costs are about two to three percent of the price of the house.
Two Important Points
The two most important things that lenders look for in a borrower are the borrower’s ability to repay the loan and their willingness to repay the loan.
The borrower’s current employer will verify the ability to repay the loan. Lenders prefer that borrowers hold the same job for at least two years, or are in the same line of work for that long.
The way the property is to be used will verify the willingness to repay. Borrowers are more likely to repay the mortgage on a house in which they live than on one they rent to someone else.
Property Buying Restrictions
Low down payment loans may only be used for a certain type of property. The price of the home is one consideration, and the other consideration is that the home is the right one for the borrower. This is because if the borrower goes for a home that is unsuitable for their family, there is a bigger chance that they may decide not to keep the house and default on the loan.
Points to consider when choosing a home that will be suitable for years are:
1) Is the neighborhood suitable for the family?
2) Are there other children in the vicinity?
3) Are there schools and playgrounds nearby?
4) Is there public transport nearby?
5) What is the distance to work and school?
6) Are the plumbing, electrical and heating systems up to code?
The real estate agent will help the borrower determine these things.
The First Meeting with the Lender
When the borrower first meets the lender, the lender will want to see proof of the borrower’s income and long-term debts. This can be done before ever looking for a house. It will narrow down the selection process if the borrower knows in advance the price of house they can afford. This is prequalification and can save the borrower a lot of time. There is not usually a fee for prequalification.
After the seller has accepted the buyer’s offer, the buyer will need to pay an application fee and appraisal fee when they submit the mortgage application. The application process will go much faster if the right documents are brought to the meeting.
The required documents the lender will need are:
1) The contract for purchasing the house if it is ready
2) Banking information including account numbers, bank address and branch, savings and checking account statements for the past three months
3) Income verification including W2 forms, pay stubs, tax returns for two years
4) Credit card bills, utility payments, cancelled rent checks
5) Other debt information such as student loan and car loan
6) For the self-employed a balance sheet and tax return
7) A letter proving than any money that was given as a gift to help with the purchase of the house does not have to be repaid
The lender should notify the borrower within 30 to 60 days if they are approved for the type of loan they want. If, for any reason, the lender denies the loan, the lender is required to explain why. There will be other options available to the borrower, and the lender will normally discuss these with the borrower.
The borrower has the right to compare the charges of different mortgage brokers and lenders. The lender is required to fully disclose the total cost of the loan including interest rate, points and other fees. The borrower also has the right for a Good Faith Estimate from the lender before deciding to accept the loan or pay any fees.
If mortgage brokers are being used, they must also explain which fees are not refundable in the event the borrower decides to cancel the loan contract. The mortgage broker must also be transparent about his or her fees and how they are paid.
Mortgage insurance is the most important aid for people buying their own home because it allows them to do so with less cash at the outset. Lenders and real estate agents will be able to answer any questions prospective homeowners have and help them through the process of getting a low down payment mortgage. The FHA has many insured mortgage programs to help people become homeowners, and there will be one to suit every type of borrower.