Better Terms Vs Opportunity Cost
The big advantage of going with a smaller down payment is that it allows you to buy a home now, rather than waiting years to save up a 20 percent stake. Meanwhile, you’re continuing to spend money on rent that could be going toward a home. You also could be missing an opportunity in that mortgage rates continue to be unusually low by historic standards. Rates have been low for about a decade now, but there’s no guarantee how long that will continue. So you could be facing significantly higher rates by the time you’re finally ready to buy.
As noted above, one of the big advantages of putting 20 percent down on a home loan is that you avoid the additional cost of mortgage insurance. That’s billed as part of your monthly mortgage statement and typically runs about 0.5 -1 percent of your loan amount per year.
That’s not an insignificant amount, but bear in mind that it’s little different from paying an additional 0.5-1 percent on your mortgage rate. So if rates rise while you’re saving a down payment, those savings from not paying for mortgage insurance could be wiped out.
In addition, private mortgage insurance , the type you get on conventional mortgages backed by Fannie Mae or Freddie Mac, can be canceled once you reach 20 percent equity. FHA mortgage insurance is more difficult to get rid of, but you can still get out of it by refinancing into a new loan once you reach 20 percent equity.
Annual Mortgage Insurance Premium
Annual MIP is included in your monthly mortgage payment and goes into an escrow account set up by your loan servicer. You must carry MIP for the life of the loan if your down payment is less than 10%.
You will pay an annual mortgage insurance premium between .45 and 1.05% basis points depending on the loan-to-value ratio and loan amount.
This is actually a great deal the FHA mortgage insurance premium used to be over 1%. However, it was recently lowered per Mortgagee Letter 2015-01.
What Is The Average Down Payment On A House
According to HousingWire, the average down payment on a home in the last 5 years has been 5% 7% of the purchase price. The publication also states that for the past 18 years, the average down payment has been below 10%. The average down payment took its lowest dip to 2.6% in 2009, most likely influenced by the Great Recession.
While 5% 7% is the average, it doesnt mean you must put that percent down on your own purchase. Depending on the type of loan you get, you may be able to put down less than 5% and you are always allowed to put down more than that as much as you want.
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Fha Mortgage Insurance Premiums
The biggest downside of FHA loans has long been the costs associated with the upfront and annual mortgage insurance premiums.
The upfront mortgage insurance premium is 1.75 percent of the loan amount. That’s $3,500 on a $200,000 mortgage loan. Although you can pay it out-of-pocket, this cost is usually added to the principal balance of your loan. So your loan amount is actually $203,500.
Then, there are annual mortgage insurance premiums to consider. Unlike Private Mortgage Insurance , which has a range of costs depending on the borrower’s credit score and down payment, FHA Mortgage Insurance Premiums go by down payment only. Borrowers with less than a 5% down payment are charged 0.85% of the outstanding loan amount each year, while borrowers with more than a 5% down payment are charged 0.80% per year for loans with terms greater than 20 years. For a borrower with a $200,000 loan and just a minimum 3.5% down payment, this means an MIP of over $143 per month. For a borrower with great credit, that’s about $40 per month more than a similar conventional loan.
Annual MIP rates are lower for borrowers who are taking out 15-year FHA-backed mortgage loans. Borrowers putting less than a 10% down payment are charged 0.70% of the loan amount each year, and those with more than a 10% down payment are charged 0.45% of the loan amount each year.
In both cases, FHA MIP are much higher for borrowers who look to take out “jumbo” FHA-backed mortgages in high-cost markets.
What Is Mortgage Insurance
Private mortgage insurance protects the lender in the event that you default on your mortgage. Typically, if you make a down payment of less than 20% of your homes purchase price, you will incur PMI. How much youll pay for this insurance will vary, depending on factors that include the size of your down payment and your credit score.
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If Your Credit Score Is 500 580
FHA loans arent just great for people with a low down payment. Theyre also a viable option if you have a low credit score. All you need is a credit score of 580 to get an FHA loan combined with a lower down payment. However, youll have to make up for it with a larger down payment if your credit score is lower than 580. You may be able to get a loan with a credit score as low as 500 points if you can bring a 10% down payment to closing. The minimum credit score with Rocket Mortgage® is 580.
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The Fha Loan Explained
An FHA loan differs from conventional loans because it does not require a sizable down payment. They are often the best option for first time buyers or borrowers who may still be establishing their credit.
It is also a good choice for borrowers that may have a bankruptcy or foreclosure on their credit file that may hinder their ability to qualify for a traditional mortgage loan.
When you get an FHA loan, you also have to pay a funding fee. This is basically a monthly insurance premium alongside the upfront premium which will add to the overall cost of the mortgage.
Additionally, you should remember that an FHA loan requires that you continue to pay a monthly mortgage insurance premium even when you have accrued equity on the home.
FHA loans were created to help stimulate housing and provide lenders a way they can operate with less of a financial risk.
FHA loans also allow you to get approved for a loan even if you have had some credit hiccups along the way or if you are in need of some additional funding for renovations or repairs.
When Fha Loans Make Sense
FHA loans are best for borrowers with lower credit scores and higher debt-to-income ratios who want to pursue homeownership now rather than waiting until their credit, debt, or income improve. This might sound like you if youre a first-time homebuyer.
People arent robots, and we dont buy homes purely based on financial analysis. Personal circumstances can make homeownership more appealing than renting even if you cant get an ideal mortgage.
Learn More: Programs for First-Time Homebuyers
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Comparing Fha And Conventional Loans
An FHA loan is backed by the Federal Housing Administration and protects the lender if the borrower defaults. An FHA loan also:
- Requires a credit score of at least 500
- Requires mortgage insurance premiums , regardless of your credit score or down payment amount
- Helps people who otherwise wouldnt qualify for home financing
A conventional loan is the most common type of mortgage, but it has no government guarantee. A conventional loan also:
- Requires a credit score of at least 620
- Requires you to buy private mortgage insurance if you place less than 20% down
- Can have less costly PMI payments compared to FHA mortgage insurance
Heres a quick look at how FHA loans and conventional loans compare:
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Can be used for primary residence, second home, or investment property |
Usda Rural Development Loans
Though somewhat obscure, this federal program offers mortgages with 0 percent down to eligible borrowers. There are a number of restrictions, however – eligibility is income-based, homes purchased must be modestly priced and borrowers must currently lack adequate housing. Homes purchased under this program technically must be in rural areas, but the definition includes many small towns and suburbs “non-urban” may be a more accurate description. Funds for this program are limited and there may be a waiting list. The number of lenders offering these loans is relatively small check with your closest USDA office to find one serving your area.
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Use This Fha Mortgage Calculator To Get An Estimate
An FHA loan is a government-backed conforming loan insured by the Federal Housing Administration. FHA loans have lower credit and down payment requirements for qualified homebuyers. For instance, the minimum required down payment for an FHA loan is only 3.5% of the purchase price. The FHA mortgage calculator includes additional costs in the estimated monthly payment. Such as, a one-time, upfront mortgage insurance premium and annual premiums paid monthly.
This FHA loan calculator provides customized information based on the information you provide. But, it assumes a few things about you. For example, that youre buying a single-family home as your primary residence. This calculator also makes assumptions about closing costs, lenders fees and other costs, which can be significant.
Estimated monthly payment and APR example: A $175,000 base loan amount with a 30-year term at an interest rate of 4.125% with a down-payment of 3.5% would result in an estimated principal and interest monthly payment of $862.98 over the full term of the loan with an Annual Percentage Rate of 5.190%.1
Where To Get Down Payment Funds
SavingsâMost home-buyers save up for their down payments by setting aside savings until they reach their desired target, whether it’s 20% or 3.5%. Having the savings in an interest-bearing account such as a savings account or in Certificates of Deposit can provide the opportunity to earn some interest. Although placing down payment savings in higher risk investments such as stocks or bonds can be more profitable, it is also riskier. For more information about or to do calculations involving savings, please visit the Savings Calculator. For more information about or to do calculations involving CDs, please visit the CD Calculator.
Piggyback LoanâIn situations where the home-buyer doesn’t have sufficient funds to make the required down payment for a home purchase, they can try to split their mortgage into two loans. A piggyback mortgage is when two separate loans are taken out for the same home. Generally, the first mortgage is set at 80% of the home’s value and the second loan is for 10%. The remaining 10% comes from the home-buyer’s savings as a down payment. This is also called an 80-10-10 loan. Home-buyers may use piggyback mortgages to avoid PMI or jumbo financing.
Gift FundsâFHA loans allow for the down payment to be a gift from a friend or family member, and the entire down payment can be considered a gift as long as there is a gift letter stating that it is a gift that does not require repayment.
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What Is A Debt
A persons debt-to-income ratio is the percentage of their gross monthly income spent to cover debts such as a mortgage, student loans, car loans, credit cards, etc. Lenders take your DTI into consideration because its often a strong indicator of how likely you are to have a hard time paying your bills.
To qualify for an FHA loan, you cannot spend more than half of your gross income on debt that is, a DTI of 50% or more. In some cases, a person may qualify with such a DTI. In general, however, lenders will want to see your debt-to-income ratio be no greater than 43%.
Fha Down Payment Assistance
If you need help with your FHA loan down payment, the FHA isnt your only resource. In many states, there are programs specifically designed to help qualifying homebuyers. In Florida, for instance, there are several local programs, as well as a statewide one called the State Housing Initiatives Partnership Program. Youll get assistance with up to 10 percent of the purchase price as a zero-interest loan.
With many of these down-payment assistance programs, youll need to be a first-time homebuyer and fall below a maximum debt-to-income ratio. Since theyre local, youll likely also need to have been a resident of the area for a specific timeframe, and you may be required to provide a small financial contribution of your own.
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Fha Loan Down Payment Gifts And Rules
Homeowners can receive cash from loved ones to go towards their down payment amount, but the HUD has put in a few stipulations. Anyone can provide up to 100% of the down payment amount, but there cannot be any expectation that the borrower will repay the funds. This includes the borrowers family members, close friends, employer, as well as charities that help first-time homebuyers.
Yes Or No For Down Payment Sources
What if you can’t come up with the entire down payment on your own? Lenders will require the full amount of money as the required down payment, but friends, family, and employers can make a down payment gift to you that reduces your financial burden. That money is required to be verified by the lender as having come from an approved source.
The FHA doesn’t just list who may give such a gift–it also has rules discussing who MAY NOT provide gift funds for an FHA loan down payment. The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent, or the builder.
FHA loan rules are specific and clear in these areas to insure fairness and to preserve the integrity of the home buying process with FHA loan funds.
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Tips For Comparing Fha Loans
FHA loans can be an excellent mortgage choice for borrowers with low credit scores and with little cash on hand to make a down payment. Borrowers who put less than 20% down on an FHA mortgage will pay a mortgage insurance premium or MIP, which is usually around 1% of the loan. The MIP can be paid upfront or over the life of the loan.
FHA loans require borrowers to have a minimum FICO score of at least 580 to qualify for a 3.5% down payment. Borrowers with FICO scores between 500 and 579 will need a 10% down payment.
One other thing to know: The FHA requirements are minimums. Lenders can make it tougher to get a loan. Many lenders, for example, require a credit score of at least 600 some set an even higher bar, requiring a minimum 620 FICO score.
Whats more, not all lenders offer FHA loans, but you should be able to find out by searching the lenders website. Once you determine whether they offer FHA loans, find out what rates they offer, any lender fees, what the minimum credit score is and the minimum debt-to-income ratio. These are the nuts and bolts of all FHA mortgages.
After you collect information, you can decide which lenders you want to apply to. If your application is approved, the lender will give you a loan estimate and from there you can see which lenders are offering the lowest rates and fees.
Other Loan Options To Consider
If you have high credit scores but are having a hard time raising a down payment of 20% of the purchase price, FHA loans are not your only option. Consider some of these alternatives:
- Freddie Mac Home Possible loan: Freddie Mac, as the Federal Home Loan Mortgage Corporation is popularly known, devised the Home Possible loan to lower the barriers to homeownership. Down payments start at 3% and can come from family, employer assistance, a secondary loan or “sweat equity.” The minimum credit score requirement is 660 , but if you or a co-applicant lack a credit score, you still could qualify through an alternative underwriting process.
- Fannie Mae 97 LTV loan: The Federal National Mortgage Association, better known as Fannie Mae, authorizes two categories of mortgage loans that require minimum down payments of 3% :
- The Fannie Mae Home Ready 97 LTV loan is designed for low-income borrowersspecifically those with incomes below 80% of their local area median income as designated by the U.S. Census Bureau.
- The Fannie Mae Standard 97 LTV loan is open to any borrower, provided at least one applicant is a first-time homebuyer and all applicants have credit scores. If all applicants for Fannie Mae LTV loans are first-time homebuyers, at least one must complete a homeowner education program.
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