If you’re in the mood for buying your first home, now might be a good time to take a step, as mortgage rates are among the lowest on record.
Still, you might think that you can’t afford the down payment or the closing costs. After all, a lot of people think it takes 20% to buy a house. While this amount is preferable, there are many programs that offer financial assistance to first-time buyers and mortgages that require as little as 3% down payment.
“The biggest hurdle is the down payment,” says Malcolm Hollensteiner, mortgage production manager at Sandy Spring Bank, headquartered in Olney, Md. When buyers think they will have to pay 20%, they may feel left out of opportunities. “If you are not near you, you might think you will never be able to do it,” he says. Yet mortgage lenders “can unlock the treasure chest of all these programs designed to make home loans affordable.”
From July 2019 to June 2020, 31% of people in the primary home market were first-time home buyers, according to the National Association of Realtors Home Buyers and Sellers 2021 Generational Trends Report. The same percentage of first-time buyers were on the market during this period the previous year.
Here’s what you need to know before you go shopping for a loan:
Buying your first home can be exciting, but requires planning and a clear understanding of your big financial picture: what’s your monthly debt ratio? that is, what are your monthly expenses compared to your monthly income? What does your credit report look like? Credit scores are based on data from your credit reports from the three credit reporting agencies: Experian, Equifax, and TransUnion. Lenders will want to know all of this to determine how much you can afford to borrow and the likelihood of you paying off the loan.
The median down payment for all buyers in 2020 was 12%, according to the NAR 2021 report. Among buyers aged 20 to 30, the median down payment was 6%. However, it is possible to put less.
Before you even start looking for homes online, figure out what you can afford. “The important thing is to talk to the lenders,” says Hollensteiner. “Familiarize yourself with all the programs. There are many ways that potential first-time home buyers can finance a property.
Lenders can give you a pre-approval letter before you start shopping in person. “Whenever they want to buy a house, it should be the first step, a kind of pre-approval,” he says.
Amy Goldstein, Vice President, BMIC Mortgage in Rockville, Maryland, advises prospective borrowers on the rule of two:
- Two years of W-2 or 1099 or two years of tax returns;
- The last two months of bank statements verifying your holdings;
- Two pay stubs, equal to 30 days of income.
A pre-approval letter, she says, is “like the golden ticket to go and see.” Know exactly what you can afford. “You have to know what you can buy. What’s the biggest amount you can afford? Look at this amount and below. Buy a home that you can afford and not default, ”she says.
Here is an overview of several programs that can help you get a low down payment mortgage:
Government insured loans
These loans are available from bank, non-bank, and credit union lenders. Check with a lender to see if they participate in government insured loans.
Loans from the Federal Housing Administration, part of the Department of Housing and Urban Development, require a minimum down payment of 3.5%, while the average down payment of the FHA loan is 4.4%. These loans are for the borrower who is ready to access homeownership but may not have a lot of cash on hand.
FHA loans are for people who have been excluded from conventional home loan requirements. They either have no credit history or have a low credit rating, according to the FHA. Other government insured loans include home loans from the Department of Veterans Affairs and the Department of Agriculture. For VA loans, up to 100% financing is available.
A credit score of 580 or higher is required for an FHA loan with a minimum down payment of 3.5%, according to HUD. With a credit score between 500 and 579, the borrower would be limited to a maximum loan-to-value ratio of 90%, and a 10% down payment would be required. The loan-to-value ratio compares the amount of your mortgage to the appraised value of the house.
FHA loans require an initial mortgage insurance premium of 1.75% of the loan balance plus an amount of 0.45% to 1.05% of the loan amount each year, depending on the amount borrowed, the ratio loan / value and loan term.
Mortgage loan insurance is mandatory for loans where the down payment is less than 20% of the appraised value of the home. “This adds a cost on top of the regular mortgage payment,” says Joel Kan, associate vice president of economic and industrial forecasting at the Mortgage Bankers Association.
The buyer “has to work harder to get equity” in their home, he adds. One option, he says, is to wait longer to buy and save more for the down payment. In addition, he points out that home ownership entails maintenance costs. “It’s the biggest financial decision most people will ever make. “
Government sponsored business loans
If you have good credit – 680 or more – government sponsored business loans offered by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.) are an option. “These are conventional loans for people with good credit, are W-2 employees and don’t have a lot of debt,” says Goldstein. “The difference between the FHA and these loans is the credit score threshold.”
An example is the FannieMae97, which only requires a 3% deposit. Another type is the Freddie Mac Home Possible, which also requires at least 3% down payment.
Fannie Mae HomeReady and Freddie Mac Home The eligibility conditions for possible loans depend on your income and where you live.
Down payment assistance
Some buyers may still think that a 3% down payment is out of their reach and may need help increasing it. For example, purchasing a $ 300,000 home through the Fannie Mae HomeReady and Freddie Mac Home Possible programs would require a down payment of $ 9,000. (The standard Fannie Mae97 product does not support a down payment.)
Some banks such as Bank of America and Sandy Spring Bank offer down payment assistance. For example, Sandy Spring Bank offers the Gap Closing Down Payment Assistance Program, which can be used with Fannie Mae Home Ready and Freddie Mac Home Possible mortgages.
In the example above, borrowers may be eligible to borrow the down payment of $ 9,000 to obtain 100% financing for the purchase of their home. “The important thing is to talk to the lenders,” says Hollensteiner. “Familiarize yourself with all the programs. There are many ways that potential first-time home buyers can finance a property.
In addition, you might be able to get the seller to pay some or all of the closing costs or obtain lender credits to cover some or all of the closing costs, he says.
State funding assistance programs
In addition to bank and non-bank down payment assistance, there are government down payment assistance programs to consider. Some are grants that do not have to be repaid as long as you own or occupy your home for a required period of time. The most common are second mortgage loans from state and local governments, and have low or no interest rates. Payments can be deferred or the loan is even canceled over time.
Down payment assistance programs are available in all states on the HUD website.
HSH.com has a database of financial aid programs across the country. Down Payment Resource is another site with useful information.
Homeownership counseling can educate first-time homebuyers on the requirements of buying a home.
“Many programs have a prior training requirement,” explains Hollensteiner.
“Before you go to the establishment, before signing any paperwork, you must provide proof that you have met the requirements, that you understand the responsibilities” and the potential difficulties of homeownership, he says. .
The goal is to “lower the foreclosure rate in the future and educate them on what they’re about to take on,” Koch explains.
To find a HUD-approved housing counseling agency in your area, call 800-569-4287 cq or visit a list of agencies on the HUD website.