Down payments shouldn’t be a barrier to homeownership
As prices continue to rise across the real estate market due to the imbalance between supply and demand, concerns about housing affordability are increasingly at the forefront of any skepticism about sustainability. of this market.
There are two main things to housing affordability: the amount of down payment required to buy a home and the resulting monthly mortgage payment.
While most borrowers focus on the monthly mortgage payment, there is also a misconception that at least 20% of the purchase price should be saved as a down payment on the purchase. Potential borrowers may be pleasantly surprised to learn that there are various loan programs designed to allow qualified borrowers to finance up to 100% of the purchase price, thus reducing (and in some cases eliminating) the initial hurdle. to set aside a large sum. money to buy a house.
The largest set of products offering loans up to 95% of the purchase price is provided by government guaranteed mortgages of Fannie Mae or Freddie Mac. These loans provide more traditional lending products to qualified borrowers with the addition of mortgage insurance to cover the increased risk for borrowers who choose lower down payments to purchase their home.
In some cases, borrowers who earn 80% or less of the median income of the county in which they buy may be eligible for a 3% down payment and less mortgage insurance. This contrasts with another federally guaranteed loan product called an FHA loan which will allow borrowers to qualify for a 3.5% drop from the purchase price. The main difference with this program is that it requires a mortgage insurance premium fee of 1.75% which can be funded in the loan and the payment of additional mortgage insurance for the life of the loan.
As mentioned earlier, there are certain loan products that will eliminate the down payment completely and provide 100% financing for the purchase price of the home. One program is the USDA home loan program which has certain restrictions for qualifying. Specifically, USDA loans are only available for properties located in certain rural areas as defined by USDA (visit USDA website to find eligible areas).
Another popular, but often underused, program is the VA Home Loan Program for Veterans (and others who qualify for a Certificate of Eligibility). This program offers 100% financing options for loans up to $ 1 million.
It is important to understand that all of these programs have certain limits and underwriting guidelines to qualify. These products should not be confused with the exotic subprime mortgages that contributed to the 2008 financial crisis. These loans encouraged risky and sometimes predatory lending which led to the high level of defaults and the foreclosure crisis. . Today, however, federal guidelines and the scrutiny of lenders have helped create a much more qualified pool of funded transactions with less risk of borrower default.
Since there are various limitations to each of these programs, it is important to consult a local mortgage professional to assess the options that may be available. Some qualified potential buyers may be sitting on the sidelines of this robust housing market thinking they don’t have the funds to buy a home, when in fact the programs discussed above could pave the way for it. home ownership.
Peter Crowley is the President of Re / Max Alliance Group.