Home ownership continues to be at the top of an average American’s wish list. However, for most of the American families, owning a home is more of a dream than reality, the biggest barrier being the need to pay a hefty down payment at the time of purchase. The good news is that with the advent of low down payment mortgages in housing market, now one can think of getting a decent mortgage setting aside a down payment of as low as 3.5%.
Such mortgages work great for first-time homebuyers, especially, when seen in contrast with traditional mortgage wherein the lender expects the homeowner to put as much as 20% down payment. Not to mention the loads of paperwork, an average homebuyer needs to present while applying for a traditional mortgage.
To qualify for a low down payment mortgage, the borrower needs to showcase his ability and willingness to repay the loan. Thus, borrowers with the following assets are in a better chance to bag such a mortgage:
a. An impressive credit history
b. Optimum income to pay the monthly mortgage payment
c. Sufficient cash to cover the associated fees and expenses (A cash reserve will be an added advantage)
Types of Low Down Payment Mortgages
Fannie Mae’s My Community Mortgage program and Freddie Mac’s Home Possible program are offered at 3% down payment and 5% down payment respectively. But these are reserved for those individuals who are blessed with a handsome income and flying credit score.
Even better are VA Loans, offered by U.S. Department of Veterans Affairs, at zero down payments. VA Loans are reserved for those with a veteran or military background. Individuals with a Navy background are also eligible for similar zero down payment financing loans. Also, there are Rural Housing Loans offered by the Department of Agriculture, for those who want to purchase a home in designated areas in the outskirts of populated cities.
It surely sounds appealing to buy a home without putting any money as down payment. But before you zero in a low down payment mortgage plan, you should know its downside too.
1. Milton Friedman rightly said, “There is no such thing as a free lunch”. It’s true for low down payment mortgages as well. Such mortgages come with additional fees and insurance costs.
· In case of VA loans and rural housing loans – Funding Fees
· In case of FHA mortgages – Mortgage Insurance Premiums
· In case of traditional private loans – Private Mortgage Insurance
2. Since the homeowner is not putting any substantial amount of money upfront, no home equity gets built up in such mortgages. It implies that the homeowner will not be eligible to apply for a home equity line of credit. So in the future, if there’s a need to undertake home repairs or other such expenses, it has to be incurred by the homeowner independently.
3. Since the homeowner is putting down only a small fraction upfront, it is obvious that he’ll have to pay comparatively larger interest payments through the loan tenure.
4. The homeowner should know that a low down payment loan limits your options to specific home types. No matter how tempting the deal looks, one should never make home buying decisions in haste. It’s best to request a certified inspector to run a thorough home inspection before you lock the deal.
A Word of Advice
Surveys have revealed that of the total number of foreclosed homes, a major fraction of the default rate is on low down payment mortgages. Thus, while applying for such mortgages, one should evaluate his financial ability proactively and make sure that he can cover the cost and repay the loan in a timely manner.
Housing market is quite competitive at this time. Housing experts suggest that homebuyers should always shop around and make a wide comparison between lenders and mortgages on the basis of price and terms and zero in the one that best suits their budget and housing needs.