If you believe that you need a good chunk of change to purchase a home, your not alone. The vast majority of first time home buyers have little money to work with and consequently do not believe they are in a position to buy a home. Either that, or credit issues prevent you from investigating the possibilities. But times have changed.
A standard conventional loan will always require that the buyer contribute a minimum 5% down payment of the actual purchase price of the home to qualify for the very best interest rate. If you have less that that to work with there are many different options. Programs have proliferated offering either 3% or no down payment options. But like everything in life, if it seems to good to be true, there is usually a catch:
- Your interest rate will be slightly higher than it would be with a minimum 5% down payment due to the high-risk nature, but are typically determined based on the borrower’s credit scores. If your credit is good, the rate will not be that much higher. If your credit is not so hot, a loan may still be available but in general, credit scores must be 600 or above and you must have a good payment history over at least the last year. Also you must have at least three tradelines (creditor’s) in existence to qualify.
- You will pay a mortgage insurance premium. Simply put, mortgage insurance protects the mortgage company against financial loss if a homeowner stops making mortgage payments. Mortgage companies usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the mortgage company’s claim on the defaulted loan. The loan can be structured as two separate loans consisting of a 1st Mortgage for 80% of the sales price and a 2nd mortgage for the remaining 20% to avoid paying mortgage insurance but the guidelines are stricter for qualifying. Since 2007, PMI is now tax deductible click here to learn more.
- There are special first time homebuyer programs that allow for low down payment loans with reduced or no mortgage insurance. The challenge is that there oftentimes are income limitations (income cannot exceed 80% of the HUD median income level or $69,000 in metro Atlanta). That generally means that homes above $250,000 are off limits.
But all that said, it is a wonderful opportunity to get into a home and take advantages of all the benefits of homeownership, the interest deduction, appreciation and pride of saying it is yours! Just remember that you will most likely have to stay put a few years in order to realize the appreciation that will allow you to move up to larger digs.