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Filed under Government Home Purchase Programs, Government Mortgage Financing Programs News

On occasion consumers will ask us “what is the optimal down payment amount for a home purchase?” The answer to that question depends on the circumstances of the borrower, but the following are some rules of thumb to follow:

25% down or more:

In some cases, such as when a borrower is selling a current home and buying a new home, borrowers will have more than 25% down. There are several advantages to having a larger down payment like this:

    – Lower loan amount means a lower monthly payment
    – Putting more than 20% down means no private mortgage insurance (PMI) required
    – At 25%+ down the interest rates tend to be the lower than with smaller down payments

20% down:

The benefits of 20% down mostly match the 25% down but rates tend to be a little higher with the 20% down option

10% down:

With 10% down borrowers normally are required to include PMI in the monthly payment (except with VA loans). The rates tend to be pretty similar or even sometimes slightly better than the 20% down option because the PMI reduces the risk to the loan investors. The other advantage of 10% down is buyers are allowed to get up to 6% seller concessions with Fannie Mae and Freddie Mac conventional loans. With less than 10% down the maximum seller concession amount for Fannie/Freddie loans is 3%.

5% down:

With 5% down all of the government-backed loan programs are still available (assuming a primary residence purchase). PMI is required and the lower the down payment on Fannie/Freddie loans, the higher PMI rate. But this is a good option for many families

3.5% down:

The FHA requires a 3.5% down payment. The FHA program remains the most popular loan program for first time home buyers due in part to its lower down payment requirement, and in part due to its leniency with credit issue. FHA tends to have marginally lower rates than conventional loans too. The primary drawbacks of the FHA programs (compared to a 5% down Fannie/Freddie loan) are that the FHA requires a non-trivial up front fee that is rolled into the loan and the monthly PMI on an FHA loan lasts all 30 years rather than dropping off when you get to 20% equity as with Fannie/Freddie loans.

0% down:

For borrowers who want to do zero down payment the options become more limited and more costly. The USDA and VA programs allow for no money down but both come with restrictions and caveats that exclude a large portion of borrowers (see here for more on that). You’ll often see advertisements from lenders for no money down programs but these “down payment assistance programs” programs are usually just FHA loans with assistance with the 3.5% down and they invariably come at a cost — usually in the form of much higher interest rates and higher fees. The problem with that is they can cost you much more in the long term.

What’s the best bet for those struggling with a down payment?

For borrowers struggling to come up with a down payment, and who are not good candidates for the USDA or VA mortgage programs, the best bet is normally to figure out a way to come up with at least 3.5% down on their own — either through their own savings or from family member help. By coming up with 3.5% to 5% down on your own you get the benefits of an FHA or Fannie/Freddie loan without having the burdensome extra costs and significantly higher interest rates that are associated with these so-called “grant programs” or other down payment assistance.

For more information contact us today on our home purchase page.

Comments (0) Posted by G.R.A. Admin on Thursday, October 25th, 2018

Filed under Government Home Purchase Programs, Government Mortgage Financing Programs News

People often come to us wondering “how much house” they can afford. This is a somewhat complicated question because there are many variables that contribute to that answer. In this post we’ll try to break those variables down and give some rule-of-thumb ballpark numbers.

Variables that go into equation:

Debt-to-income ratios: Normally borrowers want to have all of their monthly debt payments be less than 50% of their gross monthly income. So if a family makes $4000/mo gross, all of their monthly debt payments should be less than $2000/mo. So in this example if the non-housing bills (car payments, credit card minimum payments, student loan payments, etc) add up to $800/mo then the total mortgage payment (including property taxes, homeowners insurance, PMI, and HOA fees) should be under $1200/mo.

Principal and interest payment: This is the easiest and least variable part of the equation. Any calculator that has time value of money (TVM) function can help you figure this out. For instance, a 30 year fixed $150,000 mortgage at 4.5% will always have a monthly principal and interest payment of $760.03/mo.

Escrow payment: Here’s where costs can vary widely between locations. The things that can be included in the escrow payment (and debt-to-income ratio requirements) are as follows.

    Property (and other) taxes: In many states this is a single annual tax divided by 12 for the escrow. However in some states and counties property taxes are divided into sections including things like “school taxes” etc. Whatever the annual total is on all taxes on the property is divided by 12 and added to the debt-to-income ratio calculation.

    Homeowners (and flood) insurance: Again the cost of homeowners insurance can vary widely by region. For instance in areas prone to hurricanes or tornadoes, homeowners insurance can be significantly higher than average. Also if the home is in a flood zone expect higher annual premiums. Again, divide the monthly insurance costs by 12 when calculating debt to income ratios.

    Mortgage insurance (also known as PMI or MI): In most cases when you have less than a 20% down payment you will have to include mortgage insurance in your monthly payment. Mortgage insurance insures the lender against default on the loan. It is sometimes called “private mortgage insurance”, thus the popular PMI acronym. The amount of MI required depends on the loan type and on the size of the down payment. VA loans require no MI. USDA loans have something similar to MI rolled into the payments that is 0.35% of the loan amount spread out over 12 payments per year. FHA loans have MI that 0.85% of the loan amount spread over 12 payments per year. Conventional Fannie/Freddie loans have varying mortgage insurance amounts based on down payment amount and on credit scores.

    Homeowners association (HOA) fees: These are not usually included in the actual mortgage payment but they are included in the debt-to-income ratio calculation. Most condos and townhouses will have HOA fees and some single family homes have them too, depending on the neighborhood.

 
Rough ballpark numbers to expect

Because there is so much variability in the escrow items it is impossible to nail down costs nationwide. But here are some rule-of-thumb ballparks that can help triangulate a number to expect up front:

Total monthly payment Approx loan amount
~$1000 $120k-140k
~$1300 $165k-180k
~$1600 $205k-230k
~$2000 $260k-$290k
~$2500 $380k-410k

Again, it is very important to look at all of the variables when determining how much you can qualify for when it comes to a house payment. The other thing to consider is how much you can comfortably afford to pay every month — just because you can make the ratios work on a larger loan on paper doesn’t mean you are comfortable with the higher monthly payments in practice.

 
Contact us for detailed analysis of your situation

Contact us today at our home purchase page and we can connect you with a lender that is authorized to administer government-backed mortgages. They can run all your numbers for you and help you figure out how much you can qualify for and what your best bet is in terms of available programs.
 
 

Comments (0) Posted by G.R.A. Admin on Sunday, February 4th, 2018

Filed under Government Home Purchase Programs, Government Mortgage Financing Programs News

After the general election in November of 2016 mortgage interest rates spiked significantly higher than they had been the weeks and months prior to the election. Since then rates have not returned back to the low levels we saw in the summer of 2016 but they have eased back a bit from the peaks we got in December of 2016. While rates are not currently at all time lows, mortgage interest rates remain at least near 50 year lows compared to long term averages. And with housing values rising steadily in most parts of the country, buying a home is looking like a wise financial decision for more and more American families. The summer housing rush is coming to an end soon but there are often excellent housing deals to be had in the fall months. Contact us today to see about getting pre-qualified for a government-backed mortgage.

Comments (0) Posted by G.R.A. Admin on Wednesday, August 16th, 2017

Filed under Government Home Purchase Programs

While the USDA and VA mortgage programs require zero down payment when purchasing a home, the two most popular government-backed mortgage programs, FHA and Fannie Mae/Freddie Mac, do require down payments. The minimum FHA down payment amount is 3.5% of the purchase price and in most cases you need 5% of the purchase price as a down payment for Fannie/Freddie loans. Because many families have trouble saving up 3.5-5.0% of the purchase prices, there are down payment assistance (DPA) programs that have popped up all over the country.

Not Federal Programs

There is no DPA program sponsored by the federal government that works throughout the country. Rather all current government-backed DPA programs are sponsored by either city, county, or state governments. Because of this, there are no uniform rules when it comes to DPA programs — the availability and terms of DPA programs depend on the city, county, or state you live in.

DPA programs are usually not free

In the vast majority of cases, DPA programs are not “free money”. Rather, it is common for the programs to pay for themselves by charging significantly higher interest rates than the rates one would get by coming up with a down payment on one’s own (through savings or help from family). The problem with significantly higher interest rates is it could cost a borrower vastly more in interest paid over the life of the loan than the DPA money they are getting up front. In addition to higher interest rates, some DPA programs also charge up front fees that roll into the new loan. In addition, some DPA programs are just additional loans that need to be paid back rather than forgivable grants.

Because of these things, it is extremely important for borrowers to ask a lot of questions before diving into a local DPA program.

Alternatives to DPA programs

First, there are the USDA and VA mortgage programs to check out. Second, in many cases borrowers who are looking at FHA or Fannie/Freddie loans would be better off saving up a little longer or getting gift funds from family/friends to cover the down payment rather than use the local DPA program. Gifts from family are acceptable sources of down payment money (even if one intends to pay the gifter back eventually). If avoiding a DPA program means getting a significantly lower interest rate, the extra effort often pays off in the long run.

Contact us on our home purchase page to learn more or to get directed to a lender who could help you get pre-qualified for a home purchase loan.

Comments (0) Posted by G.R.A. Admin on Friday, April 28th, 2017

Filed under Government Home Purchase Programs

As we discuss on our home purchase page, there are several government-backed home purchase programs available. The main categories of programs are Fannie/Freddie loans, FHA loans, VA loans, and USDA rural housing loans. Each has advantages and disadvantages. Below is a list of some pluses and minuses of each program.

Fannie/Freddie loans

+ No up front fees
+ No PMI when you have more than 20% equity

– Requires at least 5% down payment
– Normally requires good credit scores and history

FHA loans

+ Only requires 3.5% down payment
+ Much more lenient on credit scores and past credit problems

– Has a 1.75% up front fee that rolls into loan
– Requires monthly PMI fee for the life of the loan

VA loans

+ Zero down payment required
+ No PMI

– Must have military experience to be VA eligible
– Charges up front fee of at least 2.25% of loan (unless borrower has disabled status)

USDA Rural Housing loans

+ Zero down payment required
+ Much smaller upfront fee and ongoing pmi-like fee than FHA

– Only applicable in areas deemed “rural” by USDA
– Requires good credit scores and history
– Has upper income limits — borrowers who make too much not eligible

All of these programs are excellent overall. It’s mostly a matter of which program fits best. Contact us today at our home purchase page to learn more about which program fits best for you and to get pre-qualified for a home purchase loan.

Comments (1) Posted by G.R.A. Admin on Saturday, March 11th, 2017

Filed under Government Home Purchase Programs

The USDA Rural Development home purchase program just announced plans to significantly reduce fees starting this fall. Here is what the USDA said in a recent email announcement:

Upfront Guarantee Fee and Annual Fee Reduction for Fiscal Year (FY) 2017

This message provides advance notice of the upfront guarantee fee and annual fee structure that will be effective for Single Family Housing Guaranteed Loan Program (SFHGLP) loans in fiscal year (FY) 2017, which begins October 1, 2016 and ends at the close of business on September 30, 2017. The upfront guarantee fee will change from 2.75% to 1.0% of the loan amount. The annual fee will change from 0.50% to 0.35% of the average scheduled unpaid principal balance for the life of the loan.

Please refer to the unnumbered letter (UL), “Upfront Guarantee Fee and Annual Fee for Fiscal Year 2017,” for additional details.

The USDA RD program helps home buyers purchase homes with no money down, provided the the home is located in a designated rural area. See our home purchase page for more details on the program. This reduction in fees will make the USDA RD program an even more attractive option for home buyers.

Comments (0) Posted by G.R.A. Admin on Friday, April 29th, 2016

Filed under FHA streamlines, Government Home Purchase Programs, Government Mortgage Financing Programs News

In a conference call with reporters Wednesday, Julian Castro, secretary of the Department of Housing and Urban Development, said that President Obama plans to announce a reduction in the monthly mortgage insurance fees for FHA loans. The FHA currently charges 1.35% per year in mortgage insurance fees. The new rate will reportedly be 0.85% per year, a full 0.5% reduction. This will be the equivalent of a 0.5% reduction in interest rates for FHA mortgage holders and could mean savings of up to thousands of dollars per year.

The announcement is expected to come from the President in a speech in Phoenix on Thursday. Many of the details of the pending change are still unknown, like if current FHA loan holders will need to refinance through the FHA streamline program to get the new lower mortgage insurance rate. But there is no doubt that this will be a boon to FHA loan holders and to potential home buyers.

We’ll keep you updated with more information as it comes out.

To learn more or to get started on a government-backed mortgage, contact us today.

Comments (0) Posted by G.R.A. Admin on Wednesday, January 7th, 2015

Filed under Government Home Purchase Programs, Government Mortgage Financing Programs News

Until this week, borrowers needed at least a 5% down payment to purchase a home through a Fannie Mae or Freddie Mac conventional loan program. As of this week a new 3% down program is rolling out. The new program will only apply to single family, primary residences, and as with all Fannie/Freddie loans, qualifying will require solid credit and income. Borrowers with credit troubles will probably still be best served by the FHA or VA purchase programs.

As with any new mortgage program, there will probably be some growing pains in the initial weeks of the launch. But the good news for home buyers is qualifying for a Fannie/Freddie loan will now require less money up front.

If you are interested in purchasing a home, contact us today on our home purchase page.

Comments (2) Posted by G.R.A. Admin on Thursday, December 11th, 2014

Filed under Government Home Purchase Programs

The USDA rural development program is a popular home purchase program. The primary appeal of the program is that it requires no down payment. In addition, borrowers who get a USDA RD loan avoid the expensive monthly mortgage insurance associated with FHA loans. One of the primary limitations to the program is that only homes that are in designated rural areas are eligible.

On October 1, 2014, the eligibility maps for the USDA rural housing program will change. See the USDA eligibility maps at the USDA RD site. Click on the “Single Family Housing” link in the sidebar and follow the instructions to get to the maps. Densely populated areas are not eligible but a surprisingly high number of suburbs are eligible for USDA RD program.

Contact us at our home purchase page to get more information on the USDA RD program.

Comments (0) Posted by G.R.A. Admin on Monday, August 11th, 2014

Filed under Government Home Purchase Programs

Over the last couple of years rent prices have been rising rapidly across the United States. Low vacancy rates have allowed landlords to hike rates at 2-3% per year. At the same time, mortgage interest rates have dropped over the last few months. In addition, home values have been steadily increasing again after the bottom fell out of the housing market in 2007-2008.

All of these factors add up to make purchasing and owning a home increasingly attractive to many Americans. In many areas of the country, mortgage payments are the same or lower than rent costs. And with home values steadily increasing, owning a home can mean owning an appreciating asset that can often be sold at a profit down the road rather than simply pouring money into rent.

If you have considered buying a home, contact us at our home purchase page today. Our counselors can point you in the right direction regarding available government-backed home purchase programs.

Comments (0) Posted by G.R.A. Admin on Monday, June 16th, 2014

Filed under Government Home Purchase Programs

Of the four main government-backed home purchase programs, the Fannie Mae program requires the biggest down payment, with a down payment requirement of at least 5%. In addition, the Fannie Mae program has stricter debt-to-income ratio requirements as well as higher credit score requirements than some of the other programs. Despite all of this, the Fannie Mae program remains a popular choice for those who can qualify for it for a couple of reasons:

1. No up front fees: The VA charges a 2-3% up front fee, the USDA rural housing program charges 2% up front, and the FHA charges a 1.75% up from mortgage insurance premium. With the Fannie Mae program there is no up front fee and that saves buyers thousands of dollars in many cases.

2. Temporary mortgage insurance: With the FHA and USDA the mortgage insurance (or equivalent thereof in the case of USDA loans) is set for the life of the loan. With the Fannie Mae (conventional) program the mortgage insurance (sometimes call PMI) can be dropped when you have 22% equity in the home. And when a 20% down payment is used there is no mortgage insurance requirement at all.

Not everyone has the income, credit scores, or down payment needed to qualify for a Fannie Mae home purchase loan. For the folks who don’t, the VA, FHA, or USDA programs are excellent choices. But for folks who can qualify for a Fannie Mae loan, it can be the best choice.

Contact us in on our home purchase page to learn more about the Fannie Mae home purchase program as well as the other home purchase options.

Comments (0) Posted by G.R.A. Admin on Monday, April 14th, 2014

Filed under Government Home Purchase Programs

On the surface, you might think the FHA home purchase program has some things going against it. FHA loans require a 1.75% up front fee rolled in to the loan and FHA loans include monthly mortgage insurance for the life of the loan as well. But there several tremendous advantages of the FHA program that keep it very popular.

1. Lenient credit requirements: While a minimum credit score of 620 is needed in most cases, the FHA is significantly more lenient on past credit blemishes than any of the other programs out there. The wait period after a chapter 13 bankruptcy in just 12 months and for chapter 7 bankruptcy it is just two years. The wait period after a foreclosure or short sale is just 3 years. And with FHA loans, while some outstanding collections must be paid off the FHA tends to allow medical collections to remain unsettled.

2. Less strict debt to income requirements: While the USDA and Fannie/Freddie purchase programs have very strict debt to income requirements, the FHA (and VA) programs tend to allow the ratios to stretch higher.

3. Lower and easier down payment requirements: The FHA only requires a 3.5% down payment. The minimum down payment for the Fannie/Freddie programs is 5%. Further, the FHA allows the 3.5% down payment to be given as a gift from family members. Other programs tend to be more strict about the down payment money coming from the borrower.

4. The FHA program is available to all: The VA program is only available to eligible military veterans and USDA rural housing program only applies to eligible areas considered sufficiently rural. While there are FHA restrictions on some condo complexes, the FHA program works on all single family homes in the US.

To learn more about the available government home purchase programs, including the FHA program, contact us on our home purchase page today.

Comments (0) Posted by G.R.A. Admin on Saturday, April 5th, 2014