What Are Some Mortgage Down Payment Options?
The 20% Down Payment Is Not the Only Option Out There
There are many home buyers that struggle to produce 20% down for their home loan down payment. If you are such a homebuyer, understand that 20% down is not a hard and fast rule, and there are several options out there that you should know about.
Conventional 97% LTV Program
Fannie Mae and Freddie Mac both offer the 97% Loan-to-Value program, which allows home buyers to purchase homes with just a 3% down payment. The 97% LTV loan makes for a valuable alternative to the FHA loan, in that the upfront fees are lower.
The 3% loan is a stable, fixed rate loan that can be perfect for many first-time homebuyers. Its requirements include that the homebuyers have not owned a home in the last three years, and will use the home as their primary residence; also, the amount of the loan should not exceed $424,100.
FHA – Federal Housing Administration
In 1934, the Federal Housing Administration was launched to provide an alternative to private market mortgage options. The period, although more severe, was not unlike the one from which we just emerged. Bankrupt banks, foreclosed homes, general housing despair: these were the commonalities of the day.
Since they were launched more than 80 years ago, FHA loans have consistently provided access to mortgage funding where private capital would not. HUD currently requires 3.5% down payment for most borrowers. They also provide flexibility in how and where you obtain that 3.5%.
With the recent changes bringing FHA mortgage insurance back to more reasonable levels, FHA loans continue to be a great option for many home buyers.
VA – Veterans Administration Loans
A well-deserved reward for serving in our Armed Forces, VA mortgage loans have consistently provided the preferred financing option for borrowers with a military background.
To be eligible for a VA loan, you must have served in the U.S. Armed Forces, or have been a member of the National Guard or Reserves. In some cases, spouses of deceased veterans are eligible as well.
VA loans typically offer 100% financing for qualifying veterans. VA underwriting understands the challenges that families with deployed members often face. VA underwriting guidelines provide enough wiggle room to work through those issues, as long as they can be documented and explained.
USDA – US Department of Agriculture
The “Farmer’s Loan” has served America’s rural communities for decades. Funded by the United States Department of Agriculture (USDA), this rural housing incentive is a very solid mortgage product for those that qualify.
USDA loans generally come at rates at or near the going market interest rate. Offering a low interest, no down payment mortgage option for low to middle-income families, USDA mortgage loans are one of the last 100% financing mortgage products available on the market.
Mortgage insurance rates that are 1/3rd of what FHA charges and significantly less than the private mortgage insurance (PMI) fees are required for conventional financing. There are geographic requirements for the property itself, and a lender can definitely help you figure out if your dream home qualifies for this program. The USDA program is commonly used in towns with populations of 25,000 or less.
State and Local Assistance Programs
The majority of the programs available from state housing and finance agencies are geared to low and middle-income buyers. However, there are also programs designed to stimulate neighborhoods and revitalize areas of your city that have some potential for growth and home value appreciation.
If you serve the community as a firefighter, policeman, social worker, or teacher then you’ll want to look at FHA’s “Good Neighbor Next Door Program.”
Good Neighbor Next Door allows for 50% off the purchase price for qualifying buyers. This would mean that your $150,000 house will cost you a mere $75,000 if you qualify.
There are several conditions to this program. Number one is that the home must be a HUD foreclosure and located in a HUD designated “revitalization” area. You can check what properties are available on HUD’s website.
The process of buying a new home is a journey that begins with looking for a home and ends with the closing. And, like any journey, along the way you can expect there to be days when you’re excited and days when you’re frustrated. The purpose of this guide is to help you understand the home buying process so you will be able to navigate it as smoothly as possible. In this portion of the guide, we will be going over the following topics:
- How long does it take to finance a home?
- What is the home financing process?
- What’s the best advice for a first-time mortgage applicant?
A home financing checklist will also be provided so you can be sure you have all of the documentation you need when applying for your mortgage.
How Long Does It Take to Finance a Home?
According to the National Association of Realtors, the average homebuyer looks at ten homes over a ten-week time period before they are ready to settle on a home and start the application process. This doesn’t include the time it takes to finance the home.
The typical finance process from contract to closing takes anywhere from 30 to 45 days, not including the pre-qualification process. In some cases, the process can even take 60 days, but rarely does it take longer than that. Of course, if certain issues arise after the application is submitted, it can cause a delay in the processing.
The Contract Timeline
The usual timeline for financing a new home is as follows:
- 1 to 5 days for negotiating and submitting an offer
- 1 to 3 days for signing the sales contract
- 21 to 30 days for securing the financing
- 7 to 10 days for the home inspection to be completed
The best way to ensure the financing process goes as smooth and quickly as possible is to have all of the requested information and documents collected, and the application completely filled out before submitting it.
Once the contract is accepted, the lender may require additional documents or information. To keep the process on-track and on-time, it is crucial for the requested documents or information be provided to the lender as soon as possible.
What Is the Home Financing Process?
The home financing process is complex and can sometimes be quite lengthy. This is especially the case when the borrower doesn’t have the documentation needed at the very beginning, so knowing what is required is crucial for helping the process along without any issues.
Throughout the process, the borrower will hear terms like “escrow,” “titles,” “appraisals,” “closing,” and others. For the first-time buyer, these words can seem confusing or even intimidating, but they are simply processes that need to be met before a mortgage can be approved.
The home financing process is made up of ten steps:
- Educating Yourself on the Mortgage Process & Needs (welcome to the Homes How Tos!)
- Getting Pre-Qualified for a Mortgage
- Determining the Down-Payment
- Applying for the loan
- Locking in an Interest Rate
- Loan Processing and Property Appraisal
- Mortgage Loan Approval
- Preparing Escrow and Title Documents
- Title Transfer
Getting Pre-Qualified for a Mortgage
Obtaining a pre-qualification from the lender is one of the first things a home buyer needs to do for three key reasons. First, it will determine whether or not the borrower meets the credit requirements. Second, it lets the borrower know how much home they can afford. Third, being pre-qualified shows sellers that you are serious about buying a home. While getting pre-qualified is important, it does not guarantee a loan approval. In order to get approved, the borrower’s credit and job history need to remain at the point they were when they pre-qualified or better.
Determining the Down-Payment
The down-payment plays a large role in getting approved for a mortgage because the more money that can be paid upfront, the more comfortable the lender is going to be approving the loan. Most conventional lenders require at least 20%, but there are loans available that can be approved for less money down. Paying more than the minimum down-payment can also help a borrower afford a larger home than they are pre-qualified for.
Locking in an Interest Rate
Interest rates on home loans fluctuate on a daily basis. Locking the interest rate in is important for protecting your rate from going up between the application and the approval. A borrower can lock in their interest rate simply by paying an upfront authorization fee if the lock period is longer than 90 days. If the lock period is less than 90 days, then no upfront fee is required.
Applying for the Loan
When completing the mortgage loan application form, a borrower must provide all of the requested information, including their personal and financial information, and the property they looking to buy. During the application process, the lender will provide the borrower with a Loan Estimate (LE), which outlines the closing costs of the loan. The borrower must review and approve of the Loan Estimate before the application can be processed.
Loan Processing and Property Appraisal
Once the LE is approved by the borrower, the lender will collect the documents and information required to process the loan. Also during this phase, there will be a required appraisal of the property, which lets the lender know the property’s true value.
Mortgage Loan Approval
During this step, the lender carefully reviews the application and the applicant’s credit history. All of the financial information will be verified and the level of risk evaluated. If everything is accurate and in good standing, the lender will proceed to loan approval.
Preparing Escrow and Title Documents
Escrow is a certain amount of money that the borrower needs to provide to the Title Company to hold until all of the conditions of the loan approval are met. This process is also commonly called the “pre-closing.” The Title Company conducts a title exam during this time to ensure that the property’s title is clear. The Mortgage Note and Deed are also prepared at this time.
The closing is when the borrower signs the loan documents for the property being purchased. The down-payment is also made at this time, including all of the other related costs associated with closing, like title insurance, the cost of the title exam, appraisal fees, settlement fees, credit report fees, and the application fee.
The title transfer is the last phase of the home buying process. The contract gets verified, all of the closing funds are collected, and the purchase funds are given to the seller. Finally, the keys are then handed over to the new homeowner.
What’s the Best Advice for a First-Time Mortgage Applicant?
First-time home buyers can quickly get overwhelmed by the home buying process because there are so many moving parts, and they really have no control over most of them. This is why good, sound advice is so important for the first-time buyer. The following tips will help first-time buyers avoid many of the pitfalls suffered during the process of buying a home.
Know the Full Monthly Cost of the New Home
A first-time buyer can be led astray by some of the online real estate websites. These sites provide detailed information about the properties, but they also include the average monthly mortgage amounts for the homes. This information can be misleading because a new home buyer often uses that figure to determine whether or not the home is in their affordability range.
The problem is that the number being provided doesn’t take into consideration all of the other costs of owning the home. To have the best idea of how much the home will realistically cost, the buyer should take into account expenses such as property taxes, insurance fees, average utility expenses, maintenance costs, and anything else that might be needed to maintain the home on a monthly basis.
Research the Selling Prices in the Area of Interest
Some sellers may slash the prices on their homes if they need a lot of work. Other sellers may set their prices high if they are looking to get more out of the home than it’s actually worth. The only way a buyer can be confident that the home is priced accordingly is by researching the past selling prices for homes in the area where they are interested in buying. Buyers should especially look at the recent past sales of homes that are similar in style and size, referred to as “comps.”
Review Credit History
Although lenders will at times be more lenient or more strict in their loan qualifications, the quality of the borrower’s credit history remains a make-or-break factor. Therefore, a first-time home buyer is going to want to obtain copies of their credit reports from the three credit reporting agencies (Trans Union, Equifax, and Experian), at least three months before applying for a loan. This will give the borrower time to review the reports and dispute any incorrect information or illegitimate data with the bureaus so when it comes time to apply for the loan, their credit report is as good as it can be.
Gather All of the Required Documents Before Applying
A new home buyer needs to have all of their personal and financial documents collected, organized, and ready for the lender before they apply for their loan. Don’t wait to do this because some of these documents may be difficult to track down and missing just one document can cause a delay in the loan’s processing. The information a borrower is going to need includes but is not limited to:
- Pay stubs
- Bank account statements
- Last two tax returns
- Loan and credit line statements (if any)
- Names and addresses of all former landlords for the last two years
Get Pre-Qualified for a Mortgage Loan
Having a letter of pre-qualification from a lender is a strong negotiating tool for the first-time home buyer. It proves to sellers that the buyer is serious about purchasing a home. In addition, it helps a first-time buyer get a better idea of just how much home they can realistically afford.
Don’t Give Up
If a conventional lender denies the buyer’s loan request, they shouldn’t give up hope. There are other ways to get a mortgage. For instance, FHA loans have more relaxed qualifications than conventional loans, and they also don’t require as much money down (3.5% vs. 20%). If the borrower is active duty military or a veteran, then they can also look to a VA-approved lender for a loan. VA loans can be obtained with no money down and competitive rates in a lot of cases.
Home Financing Checklist
Having all of the required information and documents collected, organized, and ready for the lender at the time the application is submitted is essential for keeping the loan approval process moving smoothly. This cannot be stated enough. Here is a checklist that will help ensure you don’t miss a thing.
- Full legal name
- Driver’s license and/or government-issued photo ID
- Social security number (have your card available in case the lender requires a copy)
- Phone number
- Primary email address
- Residential mailing addresses over the last two years
- Primary and secondary income amounts and sources (pay stubs for the last 30 days will be required)
- Monthly debt obligations
- Values of bank, retirement, investments, and other assets (the most recent two months’ statements for each will be required)
- Name, addresses, and phone numbers of all employers over the last two years
- Information about the property being purchased, including the address, year built, purchase price, and estimated down-payment amount
- Estimates of the annual property tax, homeowners insurance, and homeowners association fees (if any) for the home being purchased
- W-2s for the last two years
- Federal tax returns for the last two years
- IRS Form 4506-T — Request for tax transcript, completed, signed and dated
- Written explanation if employed less than two years or if an employment gap exists within the last two years
Additional Income Verification for Self-Employed
- Federal tax returns (personal and business) for the last three years
- List of all business debts
- Year-to-date profit and loss statement
- Written credit explanation letter for any late payments, collections, judgments, or other derogatory items in credit history
- Judicial decree or court order for each obligation due to legal action
- Payment history for public utilities, phone, cable TV, car insurance, and other expenses (if the applicant doesn’t have a traditional credit history)
- Bankruptcy/discharge papers for any bankruptcies in credit history
- Homeowners insurance information, including agent’s name and phone number
- Purchase contract signed by all parties