Q&A

Low Rates and Low Down Payment

Question:

Is it possible to get financing with both today’s low rates and little or nothing down? Answer:

Yes. Let’s look at some options.

Borrow $200,000 at 3% fixed and the monthly cost over 30 years is $843.21. Borrow the same amount at 8% – the long-term typical mortgage rate – and the monthly cost is $1467.53. The difference is huge, and for many households real estate that’s affordable at 3% is out-of-reach at 8%.

If it takes 20% down to buy a home and the typical property is priced at $315,000 a buyer then needs $63,000 in up-front cash plus thousands more in closing costs. The entry cost in this situation is so steep that the interest rate is irrelevant for households without sufficient cash savings or access to down payment assistance.

But -- and this is the good news -- what we have today is a situation where mortgage financing is available with little or nothing down plus rates at or near historic lows. You don’t need 20% down or anything close. There are several options to consider.

VA financing. For VA-qualified borrowers mortgage financing is available with nothing down. There is an up-front guarantee fee that can be added to the debt but no annual insurance cost.

FHA-backed mortgages. Loans insured under the FHA program are generally available with 3.5% down. This is an especially attractive mortgage option for first-time borrowers and those with minimal credit scores.

USDA loans: The USDA program offers two loans with nothing down. These loans are available only in “rural” areas but the definition of the term can be surprisingly broad. For specifics, see: https://eligibility.sc.egov.usda.gov/eligibility/ welcomeAction.do

The Section 502 Guaranteed Loan Program is designed to help low- and moderate-income households “purchase, build, rehabilitate, improve or relocate a dwelling in an eligible rural area with 100% financing.” Borrowers must be US citizens who will occupy the property as a prime residence. Borrowers must also be income eligible, meaning they cannot earn more than 115% of the median household income.

The USDA Section 502 Direct Loan program is for those with significant financial and housing needs. According to the government, “applicants interested in obtaining a direct loan must have an adjusted income that is at or below the applicable low-income limit for the area where they wish to buy a house and they must demonstrate a willingness and ability to repay debt.”

Fannie Mae & Freddie Mac: Both offer financing with 3% down for certain borrowers under their respective HomeReady and Home Possible programs.

The Freddie Mac program offers an interesting wrinkle. “Co-borrowers,” it says, “who do not live in the home can be included for a borrower’s one-unit residence, borrowers are permitted to have another financed property, and more – all with competitive pricing and the ease of a conventional mortgage.”

Down Payment Assistance: There are thousands of down payment assistance programs nationwide. You can search for them by location at https://downpaymentresource.com/ are-you-eligible/

For more information regarding your specific situation please speak with local mortgage lenders.

Email your real estate questions for Mr. Miller to peter@ctwfeatures.com.

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By Peter G. Miller