The days of 100% mortgages are pretty much over unless you are a qualified veteran. What to do if you do not have a 20% down payment.
FHA remains a good source of minimal down payment loans, minimum FHA down is 3.5% as of this writing. FHA has one other advantage in the manner in which it treats non-occupying co-borrowers. It is very friendly and allows parents to co-sign with children and actually carry the day in qualifying. The children occupants need to have adequate credit but the income of the parents can carry the day for loan qualification. That is not necessarily what parents should want, to be tied to the debt load of the adult child, but if that is not a concern for you, it is a good solution. It is also true that the entire 3.5% down payment may be a "gift" from the same or other parents. I have a truism that I remind folks about from time to time, everyone makes a down payment on their home, most at the time of purchase and some at the time of sale. If you have the minimum down payment and you need to sell too soon, you will have to increase that down payment at the time of the sale.
Now the conventional side. There are still a few companies that will finance 95% of the purchase price on a single family residence. That does not include condominiums, town homes or most Planned Unit Developments. The cost of the mortgage insurance is high, nearly 1% but it is none the less available and the mortgage insurance premiums may be tax deductible for some borrowers. The best part of this type of loan is that your down payment stays with the home. You can have gifted funds if you get them gifted far enough in advance. The parents co-signature is not much help and is pretty much discouraged.
So a comparison between FHA and the 5% down payment conventional will reveal that beginning in April, the FHA up front portion of the Mortgage insurance will increase to 2.25% of the loan amount. That is a big fee. The impact is softened by the fact that the fee is included in the loan amount, but that effectively shrinks the down payment or contributed equity from 3.5% to 1.25%. So if you purchase a home at say $160,000 with an FHA loan you put down $5,600 and then the loan balance is increased by $3600 so you have left only $2000 in equity. Then the FHA on going mortgage insurance premium of .5% is included in your payment. So what you have in the end is a loan of $158,000 at some rate plus .5%. If the rate is 5% your payment will be $848.18 plus the mortgage insurance component of $66 for a combined total of $914 plus taxes and insurance.
If on the other hand you make the same purchase with a conventional loan at the same rate with the required 5% down your loan will be $152,000 and your payment will be $815.97 plus the mortgage insurance component of $121 for a combined total of $937. this payment is actually $24 per month higher but consider the equity. You have put down $8,000 and it is still there. If you were to sell this home some time soon, you would have a balance $6,000 less on the conventional than on the FHA version. How important is that $6000? To be factual, $2400 of that $6000 was your increased investment so you are really out $3600. If you put the $24 you were to save on the FHA version into a bank each month is would take over 12 years for you to accumulate the $3600.
So which is better for you? It depends on a number of factors. First do you qualify on your own income and debt ratios? If you do, then FHA is less necessary for you to qualify. Second do you have excellent credit? To obtain a 95% loan your credit must be very strong. Third, do you have the down payment? If not, the FHA allows more flexibility to obtain it as a gift at closing but if the gift can be given about 90 days prior to applying for a loan, then it will be accepted.
In conclusion, if you have excellent credit, good income and reasonable debt and can obtain a 5% down payment, that is the best way for you to finance a new home.
Stay tuned for more tips and comparisons
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