Down payment blues

A limiting factor for many homebuyers is the lack of an adequate down payment.   Luckily, the mortgage industry is riding to the rescue with ways that help many homebuyers who think that they might be out of the market, who have been waiting until they have saved more. Unfortunately, in an inflationary world, you may get further behind, not ahead, by waiting.

Let’s assume that you have $5,000 saved that you can save $300 per month, and that you are hoping to buy a home with a value of $100,000.   After a year you may have $3,600 more than a year before, but what has happened to the value of the home? If homes in your market only appreciate by 3.6%, you’ve just broken even. But in many areas of the country, housing appreciation far exceeds the rate of inflation.   With an appreciation rate of 10%, that it home will now cost you $110,000, $10,000 more, and you only saved $3,600.   Near as I can figure, you’ve just “lost” $7,200.

So let’s assume that you want to buy now, using only your $5,000.   Well, you have several options. FHA and the VA have been doing 100% financing for years, although the rate for these loans may be higher than other options. Conventional loans that are sold to FannieMae and FreddieMac, the two giant organizations that buy most of the loans originated these days, may offer better options. Both agencies have introduced programs to help buyers who have scarce resources.

First, you can get 100% financing with one note.   With these programs, you have to pay Private Mortgage Insurance – PMI – and you may have to be able to contribute at least 3% of the selling price to closing costs.   That’s OK. You have $5,000.

Several lenders have programs that provide 100% financing without PMI, but the rate is correspondingly higher. Bottom line, the differences between these programs may be minimal. Remember that you can also eliminate PMI as soon as your home appreciates to the point where your loan equals 80% of the new, higher, value of your home.

Next, you can do a “piggyback”   transaction, a 1 st TD loan for 80% of the value, and a 2 nd TD loan for the other 20%.   There is nothing wrong with this kind of transaction and it is very popular as no PMI is required.   Usually the 1 st TD must be a 30-year fixed rate loan, but there are a large number of fixed rate and variable rate options for the 2 nd TD loan.

Finally, if you think that you might not qualify for your loan because of your income, you’ll be pleasantly surprised too.   With the Automated – read computerized – Underwriting that almost every lender uses these days, loans that would never have been approved a few years ago are welcomed today.

So if you’ve been hesitant about moving forward with your home purchase plans, I’d encourage you to contact a mortgage professional and have him/her evaluate your potential with your current resources.   I think you’ll be pleasantly surprised.