Financing Your Home: Knowing Your Options Will Save You Money
By Tim Wilson, Chief Executive Officer, President, Prosperity Home Mortgage.
It’s a great time to buy a home. Interest rates for mortgages remain near historic lows allowing you to buy more for your money. If you’re currently a renter who has been trying to save for a home down payment, you’ll be happy to hear about these down payment options that can put you on the path to homeownership in no time.
What are the options?
Unlike typical 20 percent down payment loans, there are mortgage programs that offer affordable no and low down payment options. Please note we have listed only a few of the programs available. Not all of these programs may be available to you or in your area and certain restrictions may apply, including loan and lender requirements that vary by program.
No down payment
The Veteran’s Administration (VA) offers zero down payment loans for veterans and active duty military members. With a VA loan, you’ll often pay a funding fee that can be financed with the home loan or paid at closing.
The USDA program also offers no down payment options, which help make homeownership more affordable for low and moderate income families in certain designated rural areas in each state. There are also income limits based on your area’s average median income and number of people living in your household.
Down payments as low as 3 percent (conventional loans)
Conventional loans are offered through Fannie Mae and Freddie Mac with a down payment as low as 3 percent. These programs, though, require private mortgage insurance (PMI), which will increase your monthly housing costs. PMI rates vary depending on the size of your down payment and your credit score. But once you have at least 20 percent in home equity, your PMI payments can be eliminated.
For borrowers who want to avoid paying PMI, there’s another option: get two loans and contribute a down payment of 5 or 10 percent. For example, with an 80/10/10 loan where the first mortgage covers 80 percent of the home’s value, a second loan accounts for 10 percent and the remaining 10 percent is the down payment. Similarly, many lenders also offer 80/15/5 loans, enabling borrowers to make a 5 percent down payment.
Down payments starting at 3.5 percent (FHA loans)
Through the Federal Housing Administration (FHA), loans are available with down payments starting at 3.5 percent, but FHA loans require both an upfront fee and annual mortgage insurance premium (MIP) paid with your monthly mortgage. Unlike PMI payments, you’ll pay the MIP for the entire loan term.
Are there other ways to save for my down payment?
Down payment assistance programs also may be available from state or local housing finance agencies. On average, buyers receive from $5,000 to $20,000 in assistance, depending on the program and state of residence. For example, through the Virginia Housing Development Authority, first-time homebuyers can receive grants of up to 2.5 percent of the purchase price of the home, which does not have to be repaid. To be eligible, homebuyers must meet certain income limits and credit score requirements.
How much does this reduce my costs?
The savings with a lower down payment loan are substantial: To purchase a $300,000 home, you would need $60,000 for a 20 percent down payment. Switching to a 3.5 percent down payment requires $10,500: $49,500 less than for a 20 percent down payment loan.
As you can see, there are many options, but also many variables. Everyone’s situation is different. A qualified mortgage consultant at Prosperity Home Mortgage, LLC, can help you through the process of finding the right loan for your needs.
Note: Low down payment options may not be the best option for all borrowers. Consult your mortgage consultant to review potential loan scenarios and financing options to determine the home loan that is right for you. All products listed are for primary residence financing only.
All first mortgage products are provided by Prosperity Home Mortgage, LLC. (877) 275-1762. Prosperity Home Mortgage, LLC products may not be available in all areas. Not all borrowers will qualify. Licensed by the NJ Department of Banking and Insurance. Licensed by the Delaware State Bank Commissioner. Also licensed in District of Columbia, Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, and West Virginia.
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