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Myth: 20% Down Payment Requirement To Purchase Your First Home

You Do Not Need a Large Down Payment to Qualify

According to a recent survey, nearly half of renters overestimate the up front costs of buying their first home. Too many believe they need to put 20% or more toward a down payment when buying a home.

That was most likely the case when your grandparents purchased their first home, but that is no longer the case.

While a 20% down payment is still considered standard, it is not the only option. Fortunately, there are loan programs that contain down payment assistance options that are designed to help first-time buyers who have little, or even no cash saved for a down payment.

In fact, there are many programs that allow buyers to put down as little as 3%. Statistics show that 7 out of 10 first tie homebuyers make a down payment of 5% or less and some first-time homebuyer programs offer NO MONEY DOWN. And as many as 15% of those who have purchased homes within the last 2 years have financed with 0% down.

Perhaps the reason for this supposed myth is due to Private Mortgage Insurance. When you finance a home with less than 20% down, you also have to pay PMI every month until you reach the required equity of 20%. This is true of regular conventional loans, but not for FHA loans which can go as low as 3.5% equity.

At first glance this may seem risky, but the Government wanted more Americans to be able to achieve the American dream. To achieve this and boost homeownership, they created the Federal Housing Administration (FHA) and began offering government backed loans that were insured against default (insurance to the mortgage company or bank in case the borrower ever defaulted on the loan). This made lending to borrowers with a lower down payment and credit scores a reality.

For instance, the FHA will back a loan for a borrower with a 500-579 credit score and a 10% down payment. If the borrower has at least a 580 credit score, they only need a 3.5% down payment to qualify for an FHA mortgage (borrower may pay more over time). Conventional loans programs offer down payments between 3% and 5%. Veterans, military service members and eligible surviving spouses can get mortgages with a down payment as little as zero.

In an analysis of historical loan data by Laurie Goodman, Jun Zhu, and Taz George with the Urban Institute shows why government-backed investors like Fannie Mae see relatively little risk in qualifying mortgage loans with down payments as low as 3-5%. The data shows that credit is a stronger indicator of default risk than down payment size. The percentage of defaults of 5-10% down loans versus 3-5% down is very similar.

“Of loans that originated in 2011 with a down payment between 3-5 percent, only 0.4 percent of borrowers have defaulted. For loans with slightly larger down payments – between 5-10 percent – the default rate was exactly the same. The story is similar for loans made in 2012, with 0.2 percent in the 3-5 percent down payment group defaulting, versus 0.1 percent of loans in the 5-10 percent down payment group.” – Urban Institute

If you’re in the process of buying a home for the first time, you probably have some questions about the best way to find and finance your dream home. At MortgageRight, our goal is to make sure you have the education and support you need. That starts with dispelling many common myths about mortgages and home buying.

Please contact MortgageRight at 205.776.8401 or Contact@MortgageRight.com for more information.

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Homebuying Loans Mortgages Purchase

Conventional Loans

Conventional (conforming) mortgage loans are financed and insured by private lenders and investors, rather than being insured by the Federal Government (FHA). Conventional loans are often sold to Freddie Mac (FHLMC) or Fannie Mae (FNMA), the largest source of loan funds in the United States, who purchase closed mortgages, freeing up funds so lenders can make more home loans. A conventional loan may also offer the choice to pay homeowners insurance and taxes directly, rather than be included in the monthly payment each month.

A conventional refinance can be a excellent way for FHA homeowners to cancel their FHA mortgage insurance premiums. Rather than refinance with the FHA, homeowners can opt to refinance with a conventional loan instead. This strategy is increasingly popular as home values continue to recover nationwide. The rules are basically the same for refinance as they are for purchase, but the results can prove to be a great way to save money on both the short and long run. Simply call MortgageRight for more info.

Disclosure: Even though a lower interest rate can have a profound effect on monthly payments and potentially save you thousands of dollars per year, the results of such refinancing may result in higher total finance charges over the life of the loan.

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VA Loans

The VA (Veterans Affairs) loan helps service members, veterans and their families become homeowners by providing a home loan guaranty benefit and other housing-related programs to help veterans obtain, retain, or adapt a home for personal occupancy.

VA guaranteed loans are provided by private lenders, such as banks and mortgage companies, and not by the VA directly. The U.S. Department of Veterans Affairs is not a direct lender, therefore the loan is made through a private lender and partially guaranteed by the VA so long as guidelines are met. Through the VA Home Loan Guaranty Program, VA guarantees a portion of your loan against loss and helps lenders provide you with more favorable financing terms.

The VA loan remains one of the few mortgage options for borrowers who do not have a down payment. VA loans are available to more than 22 million veterans and active military members.

Most members of the military, veterans, reservists and National Guard members are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.

MortgageRight is Veteran Owned and Operated and understands the needs and requirements of our veterans. We remain steadfast in honoring their dreams of homeownership.

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Government Loans Homebuying Mortgages Purchase

FHA Loans

A FHA (Federal Housing Administration) loan is a government-insured mortgage loan. An FHA loan has features that may make it easier for first-time homebuyers to achieve the dream of homeownership with low down payment options, flexible credit and income guidelines and a fixed-rate. FHA mortgage insurance protects the lender if a borrower defaults on the FHA loan.

Each FHA borrower pays a mortgage insurance premium. The premiums are collected and used by the FHA to reimburse the lender (not the borrower) should the borrower default and the lender must foreclose upon the loan and sustain a loss. This insurance enables a lender to provide loan options and benefits often not available through conventional financing. 

Fortunately, the Federal Housing Administration (FHA) requirements for credit scores and down payments are lower than for conventional loans. Borrowers may be able to qualify for an FHA loan with a credit score of at least 580 and a downpayment of just 3.5 percent. FHA loans may allow sellers to pay up to 6 percent of the loan amount to cover buyers’ closing costs.

Meet with MortgageRight.

Not all lenders can offer you a FHA loan, however MortgageRight is a Federal Housing Administration (FHA) approved lender.

  • You must prove that you have 2 years of steady employment, showing your income has remained the same or increased.
  • You cannot have declared bankruptcy in the past 2 years or had a foreclosure in the past 3 years. If you have, you may not qualify for an FHA loan.
  • You must also have the cash to pay the downpayment on your loan which is generally 3.5 percent of the total cost of the loan.

If you feel that you can or are close to meeting these requirements, call a MortgageRight loan officer today!

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Homebuying Loans Mortgages Purchase

Jumbo Loans

A jumbo rate loan is a loan that exceeds conventional or conforming loan limits (the amount Fannie Mae and Freddie Mac will buy) and is a great loan for purchasing a high-priced or luxury home. If you have a lower debt-to-income ratio, a higher credit score, and a larger down payment – a jumbo rate loan may be right for you.

In most housing markets that amount is $417,000 and any mortgage more than that is a jumbo mortgage loan. Jumbo loans are available for primary residences, second or vacation homes and investment properties and are also available in a variety of terms.

They are offered in both fixed-rate or adjustable-rate loans and may have higher interest rates than conforming and conforming high-balance home loans. Jumbo loans may also require stricter underwriting and typically require a higher down payment, higher credit score and reserves. Jumbo rate loans have no private mortgage insurance requirements.

The perks of the jumbo rate loan are numerous.

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Homebuying Mortgages Purchase

Mortgages for Millennials

Homeownership is part of the American Dream – and Millennials won’t be killing that dream anytime soon.

A Millennial’s Dream of Homeownership

At 24 years of age, Spencer Reese just became a homeowner. He purchased a two-bedroom, two-bath townhome in a Birmingham suburb. Spencer watched his spending while living in his parents’ home and saved for a down payment.

Spencer is not alone. For many Millennials (ages of 23-38 in 2019), homeownership is a priority as 90% of Millennials that are currently renting plan on buying a home in the future. Call it upbringing, most share their parents’ aspirations for a single-family home and want to be involved in their community and neighborhood.

In fact, the share of Millennial homebuyers closing purchase loans continues to rise. The Ellie Mae Millennial Tracker shows closed loan applications in the Birmingham metro areas at 37% for Millennials for the time period November 2018 – January 2019.

Even though Millennials face numerous challenges including tight credit, student loan debt and limited affordable inventory, Millennial homeownership rates are increasing at a faster rate than previous generations. All a good indication that ‘GEN Y’ is ready to buy.

Spencer shopped for homes within his price range for over a year, looking for the perfect house at a great price. Even though interest rates are still extremely low, price appreciation and a small uptick in rates were reducing his ability to meet his budget and his goal of making a 20% downpayment. So he decided to pull the trigger, knowing that waiting could cost him more money or less house. Or both.

Keeping the Dream Alive

His advice comes with experience, “Don’t automatically assume that student loan debt and little savings will disqualify you from obtaining a mortgage.” In most cases, only 1% of student debt is counted toward your debt-to-income ratio and many no or low down-payment programs are available.

“The important thing is to do your homework, keep an eye on your credit, and build a good relationship with your mortgage lender,” he adds. “I didn’t qualify the first time I applied, but my loan officer at MortgageRight took the time to explain to me what I needed to do to overcome a few obstacles. Sometimes all it takes is a gift from a family member.”

Let’s face it, Millennials have gotten a bad rap. Not only were they set up to do really well, they are smarter, can easily dominate most conversations and are masters at tech-wizardry. But then came a great recession, high unemployment numbers and all of this lead to higher student loan debt.

MortgageRight owner Tanner Allen said recently, “We find Millennials very hopeful and upbeat with a positive outlook,  and cause-driven with a desire to make the world a better place. And I know this firsthand, because one of my partners is a Millennial!”

“According to Pew Research, their generation is 75 million strong. Their size alone is promising and MortgageRight wants to be a part of their journey,” said Millennial owner Chris Carter.

Contact MortgageRight at 205.776.8401 or Contact@MortgageRight.com for more information about buying your first home.

Sources: EllieMae Millennial Tracker, Realtor.com, Pew Research Center

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Government Loans Homebuying Mortgages Purchase

USDA Loans

USDA loans are mortgage loans guaranteed by the U.S. Department of Agriculture. The program is officially known as the USDA Rural Development Guaranteed Housing Loan Program (Section 502 Loan). USDA loans are also known as ‘Rural Housing Loans’, however USDA loans can be used in many suburban areas as well – dependent upon eligibility.

USDA loans are popular among today’s home buyers because the USDA program offers no-money-down financing where homebuyers can finance 100% of a home’s purchase price and can also use when purchasing a modular home. USDA mortgage rates are typically lower than the rates for FHA, VA and Conventional mortgage rates and may offer reduced mortgage insurance rates to its borrowers.

Originally designed to help rural Americans realize the dream of homeownership, the USDA Mortgage now services a wide variety of locations, homes and properties through USDA approved lenders. The USDA Rural Development Single Family Housing Guaranteed Loan Program is one of the most powerful mortgage options available for rural and suburban homebuyers.

USDA Loans come with significant benefits that provide homebuyers the opportunity to achieve loan terms that no other program can offer. Of the many benefits, the most cited is the ability to obtain 100% financing.

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Homebuying Mortgages Purchase

Buying Your First Home

Deciding to buy a house and be your own landlord isn’t as simple as it sounds. People will tell you it is a great time to buy a house and it is, but there is more to it than that.

Owning a home is a major milestone that many people expect to achieve in their lifetime and buying a home (and mortgage) is one of the biggest purchases you will ever make. Homeownership offers stability, a sense of community and the incentive of financial security as you can see your investment grow over time.

However, homeownership is not for everyone. Even though an active and deep-rooted interest in homeownership endures in our country, not everyone is at the point and time in their life when buying a home is the right decision.

It is a big move and the journey is not necessarily intuitive. Buying a sofa or a car is one thing, the last lot in a cul-de-sac is something else entirely. And when the opportunity comes (the right house, the right price, the right neighborhood) you need to be financially and emotionally prepared to pull the trigger.

When speaking to first time homebuyers, we routinely ask them if they have considered:

  • The financial benefits of buying vs renting
  • The responsibilities of buying vs renting 
  • Neighborhoods, amenities or school districts 
  • How credit scores affect mortgage interest rates
  • How much house you can afford 
  • The steps and process of obtaining a mortgage
  • Ultimately, you determine when you are ready to genuinely embrace the freedom and opportunities of ‘The American Dream’ of homeownership. MortgageRight can help guide you through the home buying journey by helping you identify potential challenges before they arise. Our goal is to help make the process less daunting – and more rewarding.

Start the Process

Based on favorable economic indicators and changes in the mortgage process, it looks as if 2019 will be another banner year – and a great time to achieve the American Dream of Homeownership. So, if you’re considering becoming a homeowner and are thinking seriously about leaving your landlord, you will need to start gathering documents and organizing your finances.

MortgageRight can help guide you through the home buying journey by helping you identify potential challenges before they arise. Our goal is to help make the process less daunting – and more rewarding.

Please contact MortgageRight at 205.776.8401 or Contact@MortgageRight.com for more information about buying vs. renting.