Down payments should not be hurdle to home ownership.
There are various lending programs designed to allow qualified borrowers the opportunity to finance up to 100% of the purchase price.
by Peter Crowley, President of
RE/MAX Alliance Group
As prices continue to rise throughout the real estate market due to the imbalance of supply and demand, concerns over housing affordability are increasingly at the forefront of any skepticism about the sustainability of this market.
There are two main components of housing affordability – the amount of down payment required to purchase a home and the resulting monthly mortgage payment.
While most borrowers focus on the monthly mortgage payment, there is also a large misconception that at least 20% of the purchase price must be saved as a down payment on the purchase. Potential borrowers may be pleasantly surprised to learn that there are various lending programs designed to allow qualified borrowers the opportunity to finance up to 100% of the purchase price, thus reducing (and in some cases eliminating) the initial hurdle of setting aside a large sum of money to purchase a home.
The largest pool of products that provide for loans up to 95% of the purchase price are provided by government backed mortgages from Fannie Mae or Freddie Mac. These loans provide more traditional loan products to qualified borrowers with the addition of mortgage insurance to cover the increased risk for borrowers choosing lower down payments for their home purchase.
In some cases, borrowers that earn 80% or less of the median income for the county in which they are buying could qualify for 3% down and lower mortgage insurance. This contrasts with another federally backed loan product called an FHA loan which will allow borrowers to qualify for 3.5% down toward the purchase price. The main difference with this program is that it requires a fee of 1.75% mortgage insurance premium that can be financed into the loan and paying additional mortgage insurance for the life of the loan.
As previously mentioned, there are some loan products that will eliminate the down payment completely and provide 100% of the financing of the purchase price of the home. One program is the USDA home loan program that has certain restrictions for qualification. Most notably, USDA loans are only available to properties located in certain rural areas as defined by the USDA (visit the USDA website to search for eligible areas).
Another popular, but often underutilized program is the VA home loan program for military veterans (and others that qualify for a Certificate of Eligibility). This program provides 100% financing options for loans up to $1 million.
It is important to understand that all of these programs have certain limitations and underwriting guidelines to qualify. These products are not to be confused with the exotic sub-prime mortgages that contributed to the financial crisis in 2008. Those loans encouraged risky and sometimes predatory lending that led to the high level of loan defaults and subsequent foreclosure crisis. Today, however, federal guidelines and lender scrutiny have contributed toward a much more qualified pool of financed transactions with less risk of borrower default.
Since there are various limitations to each of these programs, it is important to consult with a local mortgage professional to assess the options that may be available. Some potential qualified buyers may be sitting on the sidelines of this robust housing market thinking that they do not have the funds to purchase a home, when in fact, the programs discussed above could provide a path to home ownership.
We would like to thank our guest author Peter Crowley
Larry and Ann Brzostek
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