The South Florida real estate market has been trending upwards with great momentum for some time now, although that growth is likely to begin to slow in the near future. Likewise, interest rates have remained low for a number of years, but have recently begun edging up over the past few months and are expected to continue to rise in 2017.
To put it another way, if you’ve been thinking about buying real estate – especially if you’d be a first-time homeowner – now is the time to take action before it’s too late.
For many prospective buyers, however, it isn’t a lack of motivation which is keeping them from jumping into the real estate market; it’s the belief that they simply don’t have enough money saved up in order to afford a down payment.
Sure, traditional mortgages have historically required a 20% down payment. If you were purchasing a $300,000 home, you would need to bring at least $60,000 to the closing table. But today there are a wide variety of different mortgages and financial products available to make homeownership a reality with as little as just 3% down for most people with decent credit, and even 0% down for buyers in certain situations.
Conventional Mortgages
Conventional mortgages are the loans which are most often associated with needing a 20% down payment. Thanks to the help of Fannie Mae and Freddie Mac, however, conventional mortgages are available to buyers with as little as 3% down.
Fannie Mae and Freddie Mac are government sponsored enterprises (GSEs) which help maintain stability in housing and open up liquidity in the mortgage market. One of the ways in which they accomplish this is by guaranteeing consumer mortgages which meet their minimum set of standards. This means that even if the borrower stops making their payments, the GSE will ensure that the lender recoups their investment – giving banks and other financial institutions incentive to lend to more buyers.
Fannie Mae and Freddie Mac both have programs which provide up to 97% of a home’s value, allowing buyers to come to the closing table with just 3% down. For a $300,000 home, that means a down payment of just $9,000. One downside, however, is that these loans are usually only available for buyers with good to great credit – a minimum score of 660 is typically required.
FHA Loans
For buyers who don’t qualify for a conventional loan backed by Fannie Mae or Freddie Mac, FHA loans offer a great alternative. As the name implies, FHA loans are backed by the Federal Housing Administration, and protected through mortgage insurance paid for by the borrowers.
This allows lenders to offer financial products which require as little as 3.5% down to buyers with a credit score of 580 or higher. For hopeful homeowners with a credit score between 500 and 579, mortgages are available which require a reduced down payment of 10%.
Another benefit of FHA loans is that while other mortgages require the down payment to come directly from the buyers, these products allow for alternative down payment sources, including receiving the funds as a gift from a family member or friend, from a government down-payment assistance program, and even from the seller in the form of a credit on the closing statement.
VA Loans
For prospective homebuyers who have served or are currently serving in the military, VA loans are tough to beat. These mortgages are secured by the Veterans Administration for all active-duty and past service members who meet their list of eligibility requirements. These VA loans offer 0% down financing, and unlike most other types of low down payment loans, they do not require the borrowers to pay for mortgage insurance.
Not every veteran will qualify for a VA loan, however: lenders still follow their own set of lending guidelines and in most cases will require a minimum credit score of 620 for approval.
USDA Loans
Another great product available to buyers who are looking at suburban and rural properties is a USDA loan. These loans are backed by the United States Department of Agriculture and provide 100% financing for residential real estate outside of major urban areas. To put it in perspective, 97% of the land in the United States qualifies for a USDA loan.
Similar to FHA loans, mortgages backed by the USDA allow closing costs to be gifted or paid for by family members, friends, or even the seller. Mortgage insurance is required on USDA loans, but is normally wrapped into the monthly mortgage payments. Since December 2014, the USDA has required a minimum credit score of 640 on all loans that they secure.
Is It Really This Easy to Get a Loan?
For the majority of buyers who have at least a decent credit score or better, yes, getting an affordable home loan at a reasonable rate is still pretty simple. That’s because there are so many different programs currently available to minimize the amount of money needed at closing. This helps the buyers who otherwise wouldn’t be able to afford the 20% down payment traditionally needed to purchase a home. And luckily, it doesn’t look like those programs are going anywhere anytime soon.
But the market conditions we’re currently experiencing, on the other hand, are likely to undergo changes as we progress through 2017. Home values are continuing to trend upwards, and interest rates are steadily moving higher as well. This means that while low down payment mortgage options will still be available for some time to come, rising home and mortgage costs will cause housing affordability – and purchasing power – to decline in the near-to-mid future. In other words: if you’re thinking about buying, now is the time to do so.
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