The Race to LOW DOWN Loans

LOW DOWN MORTGAGES are the newest rage for first time home buyers and purchases. In fact, FHA, our Federal Housing Authority, has been essentially doing this for years. The FHA version requires that both you and your broker be willing to negotiate a mountain of paperwork and extra forms and some pretty fancy footwork. Not all banks and brokers are licensed to handle FHA loans. Since most brokers are inherently lazy, they prefer conventional 100% loans. It depends entirely on your circumstances which product works for you, not your broker!!

LOW DOWN loans come in several flavors: 1. 100% LTV Mortgage allows you to purchase a home by paying only the closing costs, around 4% for an average new home purchase. 2. 104% LTV Mortgage is truly incredible. In this scenario, you take out a 97% 1st Mortgage and the lender 'piggybacks' a 3-6% 2nd mortgage plus the closing costs of both mortgages. My Community, and Home Possible Loans offer very similar options appropriate to specific borrower types. 3. 125% LTV Mortgages are an amazing option. The rates are high due to anticipated negative loan to value. Only a few lenders offer them.

Of course, like any good thing there is always a catch. 100% loans have higher interest rates and may require Mortgage Insurance or MI, as does the FHA version. Contrary to popular opinion, MI is not a terrible thing. It is essentially an insurance policy that protects the lender in case you default....so that makes them willing to take on an unknown risk of a borrower with no money to invest. MI requires an upfront contribution and monthly premium payment. However, MI is not a lifetime commitment! Within 2 years, you can request that your bank review your equity position and in many cases (i.e., your home's value has improved) they will allow you to drop it. It goes without saying that you should have maintained a consistently faithful payment history! MI UPDATE 12/06: Fortunately, MI is now tax deductible as of December 2006.

The FHA or Home Possible version are probably still the best option for first time homebuyers with credit or work history challenges. These are full documentation loans. Not all brokers or banks are FHA qualified, trained and patient enough to handle government loans so be sure to shop around for a source that routinely handles and is licensed. Another hitch is the FHA's lending limits for your region are geared toward the median and below price range. In Whatcom County, WA the loan limit is currently $285,000 for an FHA loan, (July 07) although the sale price could be higher if you are bringing money into the transaction.

NO CASH for a deposit? There's more than one way to skin a cat! Many lenders allow borrowers to use down payment assistance or 'Gift Funds' from their list of approved non profit gift fund companies. It sounds rather draconian, but you pay a $300 fee for the 'use' of their funds prior to closing and the lender pays back the gift fund after the loan has funded. If putting absolutely nothing down sounds scary to you, then your broker should be willing to help you negotiate some 'seller contributions' in the form of down payment assistance or by agreeing to pay your closing costs on a conventional mortgage. Lenders usually allow sellers to contribute up to 6% of the purchase price.

My motto here is: "If you don't ask, you don't get!" Here's your realtor's chance to earn their keep and work with your broker or bank to structure a Purchase & Sale agreement that accomplishes your purchase with the least possible down payment. Since everybody gets paid at closing everybody wins! In many cases, if you are buying a home that needs a little work, seller credits are perfectly acceptable and normal practice. All it takes is a willing seller and cooperative broker/realtor team.

The biggest advantage of 100% financing is helping you get into a home while interest rates are low at today's home prices. In a seller's market (competition can be fierce) not all sellers need to bother with seller contributions because they may have several people bidding up the price! As the rates go up and sales cool a little you are urged to consider buying before the rates outstrip your earning potential or Debt to Income rations. Taking a leap of faith now may put you in much better stead in the near future. In a couple of years, you can negotiate out of Mortgage Insurance or consider refinancing into a better fixed rate with your improved equity position and credit rating from your successful mortgage history.

Wishing you every mortgage sanity! Loannetter
©2005 susan templeton