Faced with a down payment crisis? There are other ways you can still make the mortgage
How often do we find ourselves in a situation where we tap all the right instincts and display great credit ratings for acquiring a new mortgage at competitive rates only to discover to our chagrin that we are short on money to make the initial down payment? You find yourself stymied; unable to make the crucial 20% payment upfront that will kick start the mortgage deal.
As you may be aware, the federal government won’t insure your home loan unless you make a 20% down payment. If for any reason you find yourself unable to meet the 20% cash deadline, private mortgage insurance will be the only alternative, and such a loan garnered from private sources will easily add 0.5% to 1% to your overall loan liability within the year. What this means in real terms is that going the private insurance route for a loan of say $200,000 may result in an annual cash outflow of $2,000 or thereabouts, and this will most likely continue till you make sufficient investments to set off the contribution.
But if this debate gives you the impression that you can’t avoid a 20% contribution for a mortgage loan, you would be sorely mistaken. Fortunately, most banks and many private lenders would be more than willing to finance your dream dollar by insisting on a lower down payment of 5%. The only prerequisite is good credit standing, and an improved rating automatically improves your chances of lowering the down payment requirements. But do remember that affording a 20% down payment can save you the botheration of opting for private insurance and gives you the opportunity to accumulate your investment in home equity free of tension, and such a move could boost home values in a sudden real estate crash. You may be tempted by a lower down payment offer but consider the higher down payment as an act of self-discipline that will yield benefits in the longer term when you may be confronted with a cash crisis as when you seek a new job or move elsewhere.
Of course it’s a different matter altogether if you can’t raise the combative $40,000 on a $200,000 mortgage, and such a scenario will necessarily make you explore smaller down payment alternatives.
An easier down payment option from Fannie Mae and Freddie Mac
In many instances traditional lenders are making a case for a 3% down payment that paves the way for the mortgage of the citizen’s dreams. The only rule that can’t be avoided is that this opportunity is available only if one of the borrowers/ partners is availing a home loan for the first time, and the ceiling for loan assistance is $417,000. This is certainly worth considering because it saves you from parting with more funds that you can handle in one go.
Federal Housing Administration loans
These are home loans that are insured by the FHA where it is possible to secure a mortgage with a lower down payment. Ensure that your FICO score touches 580 points before you apply for these loans, and benefit from a lump sum down payment of 3.5% of the initial home purchase offer. Please note that scores between 500 and above but below 580 will qualify for a higher down payment of 10% of the home purchase price. It is important to keep in mind that the FHA insures the loan but does not originate the loan for which you have to negotiate with bankers or private lenders. But this is not a hurdle because a huge number of lenders are willing to give you loans backed by FHA insurance.
U.S. Department of Veterans Affairs loans
If you are a past or present member of the U.S. Military, the National Guard or the Reserves you would automatically qualify for VA loans that do not stipulate any down payment.
U.S. Department of Agriculture Rural Home loans
This is a section-502 home loan that is insured by the USDA as a rural development loan, and it is also free of any down payment. This loan mainly targets borrowers that are confined to rural and semi urban areas and earn lower incomes. To ascertain your eligibility check the USDA income listings specific to your county. You will be approved loans only if your income does not exceed the listed income ceiling specific to your residential location.
When all else fails call your nearest lender
Restrictions in domestic cash supply, inadequate credit scores and ineligibility for VA loans and USDA loans might make the job of availing government and private insured loans tougher. Despite such setbacks you could still be eligible for a lower down payment between 5% to 10% if the lender is satisfied with your score and credit management record. So do not waste a second and call the licensed lender in your neighborhood to test the waters for lower down payment loans.
Being short of funds and being unable to make a hefty 20% down payment is not as big a hurdle as one would make it out to be; the challenge lies in making the most of the opportunities that the government and private lenders open for you – opportunities that could potentially safeguard your hard earned savings when you are focused on expensive home purchase decisions