There are still low and no down payment mortgages on the market but buyers need to be aware that these tend to actually be expensive options in the long run. For instance, FHA loans are among the most popular low down payment guaranteed loans. Due to insurance losses over the previous seven or so years, the FHA has been forced to raise fee rates. Generally, the FHA guarantees low down payment mortgages for people with less than stellar credit histories.
Down payments as low as 3.5 percent can be guaranteed but there are initial and on going FHA fees for the guarantee. Fees vary depending on loan terms, loan amounts, and refinancing versus an original loan. An Up-Front Mortgage Insurance Premium of 1.7 percent is charged regardless of loan terms. This fee can be wrapped into your mortgage. For minimum down payment loans, there is an annual on going fee of 1.25 percent. At the beginning of a $100,000 loan, this amounts to an annual cost to the borrower of $1,250 or slightly more than $100 per month. It’s the equivalent of adding 1.25 percent to the interest rate that you are paying.
For those with a reasonable credit history, private mortgage insurance (PMI) is probably a better option. Generally, you can obtain a 3 percent down payment loan with private mortgage insurance but credit histories are more stringent. The fees for PMI are less than for FHA loans. Just as importantly, once the loan to value ratio is below 80 percent, the PMI can be cancelled so that you stop paying the insurance fee. That doesn’t mean you have to pay 20 percent off the loan. Appreciation in value of the house can get you below 80 percent faster. But you do need to request that the insurance be cancelled or it will continue.
U.S. Department of Agriculture (USDA) loans are another low cost option compared to FHA loans. These loans are so popular that they typically run out of funding before the fiscal year is over. Many people think these loans are limited to farmland but they are not. However, there are geographical limits. The USDA maintains maps on its website showing the areas that loans are available. For the most part, these loans are intended for first time buyers but there are exceptions. There is a one time 2 percent fee at the origination of the loan that can be rolled into the loan. The annual on going guarantee fee is significantly less than the FHA fee at 0.5 percent.
Veteran Administration (VA) loans and Navy Federal Credit Union loans are the two most popular loans available to those who served in the military. However, Navy Federal loans are available to some people that didn’t serve directly in the military. These include some civilian employees of the military and U.S. Department of Defense, and family members.
Generally, these loans are available with zero down payments. The costs and fees charged for these guarantees vary based on circumstances. The VA origination fee can vary between 2.15 and 3.3 percent depending if the applicant was Regular Military, Reserves, or National Guard. The Navy Federal origination cost is much less than the VA at 1.75 percent.
People with low or no down payment need to be aware that there are loan guarantee programs out there that they may qualify for. However, people should also be aware that these programs come at a cost that is wrapped into the monthly mortgage payment. It’s important to shop around for the mortgage that makes the most sense for personal circumstances. Also, don’t pay any up front fees until a final decision has been made about which loan to go with.
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