I’ve seen a lot of mis-information on various blogs and social media pages concerning mortgage loans and how much money you need to save to purchase a home. Many people think you still need 20% down to purchase a home and that is not the case. There are many different types of mortgages and to find out what you qualify for, you need to visit a local mortgage lender. Better yet, find a good, local Realtor that you click with and have them recommend a good mortgage lender, someone they trust.
To give you an idea of some of the types of mortgages that may be available to you, I’ll list some of the ones I’m familiar with that my clients have used:
VA Loan – 100% financing available to qualified current military and veterans. There are various funding fee amounts with a VA loan from none for a disabled vet to about 3.3% for a veteran who has used their VA benefit before. The nice thing about a VA loan is the funding fee can be added to the mortgage amount so you don’t have to pay that up front and the interest rates are good. The loan is one of the most flexible when it comes to credit score and debt ratios.
FHA Loan – Very popular among first-time buyers and many move-up buyers, this loan is insured by the government and only requires a 3.5% interest rate to qualified borrowers with about a 640 or better FICO score. There is upfront mortgage insurance required which can be added to the mortgage plus an additional monthly mortgage insurance amount. This loan allows for a higher debt ratio than a conventional loan and a lower credit score.
CDA Loan - This is a loan that qualified first-time buyers can use that will give them a $5000 downpayment that they can use towards their downpayment. You are required to take a buyer's education class for this loan. This may or may not be a program that you want to use. The $5000 down is a 0% loan that doesn't have to be paid until you sell or refinance the home, which is nice, but sometimes the rate is higher than an FHA loan so it may not be worth it. You'll need to ask your lender what the current rates are when comparing loan types.
USDA Loan – Another 100% financing loan available to qualified borrowers, this loan is only available in certain towns. The qualifying for this loan is similar to an FHA loan but there is an upper income limit in place. Interest rates also are very good.
Conventional Loan – There are a lot of choices now with conventional financing. The standard conventional loan requires a 20% down payment to have a loan with no mortgage insurance but now lenders have several other creative options that they are offering including lender-paid mortgage insurance and second mortgages. The lender may offer you an option to pay all of your mortgage insurance upfront in a lump sum (saves thousands and is way less than you’d think), or they may offer to pay it for you for a small rate bump. You could also get a 90-10-10 loan where your first mortgage is 90%, second is 10% and you put 10% down, which will avoid the mortgage insurance but your second mortgage will be a substantially higher interest rate typically. You could also choose to put down only 5% or 3%. The lower the downpayment on a conventional loan, usually means a higher mortgage insurance amount. Mortgage insurance on a conventional loan is very credit-score driven, meaning the higher the downpayment and the higher the credit score, the lower the mortgage insurance is. Mortgage insurance, like any other insurance, is risk based so the higher your credit score is, the more likely you are to pay your mortgage on time in the insurers eyes, so the lower your cost is. If your score is under about 720 or so, you may be better off looking into an FHA loan.
There are also various grant and closing help programs that are available to those who qualify, some of which are also location based.
I’m not a mortgage lender so you will want to discuss these options with a licensed lender so they can advise you on the best loan program with you and the pros and cons for your specific situation.
Some people are really averse to the idea of paying mortgage insurance, but if you look at certain areas like the areas that we serve in Maryland, saving up 20% can be quite a daunting task. Rents around the Ft. Meade area, into Anne Arundel, Howard, Prince Georges, and Montgomery counties, tend to be much higher than a mortgage would be. In addition to the costs, renters do not have mortgage insurance tax write-off, their rents can go up each year and the landlord can sell the house out from under them and then they have to move whether they want to or not!
Purchasing a home can be a much better plan than being a lifelong renter for many, many reasons. If you’re going to be in an area for 3, 4, 5 years or more, consider purchasing a home and talking with your mortgage lender to find out how you can buy now and take advantage of historically low interest rates and lower downpayment requirements!
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