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What Makes Low Down Payment Loans Possible? |
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Simply put, mortgage insurance protects the
mortgage company against financial loss if a homeowner stops making
mortgage payments. Mortgage companies usually require insurance on low
down payment loans for protection in the event that the homeowner
fails to make his or her payments. When a homeowner fails to make the
mortgage payments, a default occurs and the home goes into
foreclosure. Both the homeowner and the mortgage insurer lose in a
foreclosure. The homeowner loses the house and all of the money put
into it. The mortgage insurer will then have to pay the mortgage
company's claim on the defaulted loan.
For this reason, it is crucial that the family buying the home can
really afford it, not only at the time it is purchased, but throughout
the time period of the loan.
Although the cost of the mortgage insurance is paid by the home
buyer, or borrower, the mortgage insurer works directly with the
mortgage company. Mortgage insurance is available to commercial banks,
savings & loans and mortgage bankers, all of whom offer mortgage loans
to home buyers.
Remember that mortgage insurance is not the same as credit life
insurance, also called mortgage life insurance. This type of policy
repays an outstanding mortgage balance upon the death of the person
who took out the insurance policy.
The Secondary Market
The mortgage company's decision to use mortgage insurance is driven
by the requirements of investors in the mortgage market. Because of
the losses that could occur, major investors require mortgage
insurance on all loans made with low down payments.
The three primary investors in home loans are Federal National
Mortgage Association (Fannie Mae), Federal Home Loan Mortgage
Corporation (Freddie Mac) and Government National Mortgage Association
(Ginnie Mae). By purchasing and selling residential mortgages, Fannie
Mae and Freddie Mac help keep money available for homes across the
country.
Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy
mortgages. It adds the guarantee of the full faith and credit of the
U.S. Government to mortgage securities issued by mortgage companies.
The Two Choices: Government Insurance
and Private Insurance
Now that we have explained how mortgage insurance works and why it
is necessary, let's look at the basic kinds of mortgage insurance. Low
down payment mortgages can be insured in two ways -- through the
government or through the private sector. Mortgages backed by the
government are insured by the Federal Housing Administration (FHA),
the Department of Veterans Affairs (VA) or the Farmers Home
Administration (FmHA).
Although anyone can apply for FHA insurance, the other two
government mortgage guarantee programs are much more targeted. The VA
program is limited to qualified, eligible veterans and reservists.
This program is very specialized, so contact your mortgage
professional for the details. The FmHA insures loans for the
construction and purchase of homes in rural communities.
Obtaining conventional financing is the alternative to obtaining a
home loan backed by the government. Conventional mortgages are all
home loans not guaranteed by the government, including those
guaranteed by private mortgage insurers.
Although government and private insurance are based on the same
concept of allowing families to get into homes with less cash down,
there are many differences between the two. Often, your mortgage
professional will play an important role in suggesting and deciding
which insurance is selected.
Home buyers must make a down payment of at least 5% of a home's
value to be considered for private mortgage insurance. However, under
some special programs, the down payment requirement allows the buyer
to use a gift or grant to cover 2% of the 5% down payment required by
private mortgage insurers. The gift or grant may come from a friend,
relative, community group or other organization.
Private mortgage insurance is available on a wide variety of home
loans and there is no pre-set limit on the loan amount. Although
differences such as these may affect whether the mortgage company
prefers to work with government or conventional mortgages, your
mortgage professional will discuss which one would be better for your
situation.
With the wide variety of loans available, home buyers have the
freedom to choose the type of loan that best suits their needs. Early
on in the home buying process, it is a good idea to meet with several
companies to compare the types of mortgages they offer and shop for
the best price and terms. Best of all, working with a mortgage insurer
can be very easy, whether your loan is insured by the FHA or a private
mortgage insurance company, because your mortgage professional handles
all of the arrangements.
By making lending money to home buyers safer, mortgage insurance
helps more families get into homes of their own.
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Down Payment Loans and Gifts
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Loans and gifts can help with your down
payment but you can not use this strategy for all loan programs.
The most popular program for this tactic is the Federal Housing
Administration or FHA. FHA allows 100% gift funds for your down
payment. The gift can be from any relative or can be collected
through new innovative programs, like the Bridal Registry where
couples receive money into an account that can be used for the
down payment.
Another popular tactic, which can be used in a wider range of
programs, is to borrow from your 401K program. If you have a 401K
program with your employer, you can withdraw without a penalty for
your down payment and pay it back over a specified period. There
are some drawbacks, the payment will be used in qualifying and
your 401K account will not continue to grow as fast. Even with
these drawbacks, it is often a smart move if this is your only
option.
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Down Payment - Grant That Is Never
Repaid By The Homebuyer! |
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There are national non-profit
organizations dedicated to assisting homebuyers with their down
payment and closing costs.
Buyers can receive a free gift under these programs. Gift
amounts vary with each program but are generally available in
amounts of 3% with some programs, all the way up to $22,500 with
others. Buyers never have to repay these gifts.
It's easy to receive a free gift from these programs, however
qualification guidelines do vary with each program. Each program
requires that buyers must qualify for any eligible loan program
with their lender (there are many programs that qualify).
While this is the ONLY qualifying requirement of some programs,
others have requirements such as requiring that the buyer complete
a Home Ownership Counseling Course or provide 1% of their own
funds into the transaction. In addition some programs have
income/asset restrictions, recapture clauses, reserves required,
or geographic boundaries. Each program can provide you with their
specific requirements and/or limitations
These programs generally participate with FHA, Conforming, and
Non-Conforming loan products. Most of these programs do not
underwrite the loan or add any cost in the form of points, fees,
etc., they simply provide the gift for the down payment and/or
closing costs.
These downpayment assistance programs can be used for Single
Family (1-4 unit) homes, Manufactured/Modular Homes, Condominiums,
Townhouses, Existing or New Construction, Rehab and
Non-Conforming.
Other Resources:
Partners
in Charity Program
Home Down Payment Gift Foundation
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Qualifying for a Low Down Payment Loan
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To be considered for a low down payment
loan, you generally need to have:
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Sufficient income to support the monthly mortgage payment |
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Enough cash to cover the down payment |
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Sufficient cash to cover normal closing costs and related
expenses (explained below) |
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A good credit background that indicates your payment history
or "willingness to pay" |
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Sufficient appraisal value, which shows the house is at least
equal to the purchase price |
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In some instances, a cash reserve equivalent to two monthly
mortgage payments |
Closing costs, or settlement costs, are paid when the home
buyer and the seller meet to exchange the necessary papers for the
house to be legally transferred. On the average, closing costs run
approximately 2% to 3% of the house price. This percentage may
vary, depending on where you live.
Closing costs include the loan origination fee (if not already
paid), points, prepaid homeowner's insurance, appraisal fee,
lawyer's fee, recording fee, title search and insurance, tax
adjustments, agent commissions, mortgage insurance (if you are
putting less than 20% down) and other expenses. Your mortgage
professional will give you a more exact estimate of your closing
costs.
Points are finance charges that are calculated at closing. Each
point equals 1% of the loan amount. For example, 2 points on a
$100,000 loan equals $2,000. Companies may charge 1, 2 or 3 points
in up-front costs in addition to the down payment. The more points
you pay, the lower your interest rate will be. In some cases, you
may be able to finance the points.
So How Much of a Mortgage Can You
Afford?
There are two basic formulas commonly used to determine how
much of a mortgage you can reasonably afford. These formulas are
called qualifying ratios because they estimate the amount of money
you should spend on mortgage payments in relation to your income
and other expenses.
It is important to remember that the following ratios may vary
and each application is handled on an individual basis, so the
guidelines are just that -- guidelines. There are many
affordability programs, both government and conventional, that
have more lenient requirements for low- and moderate-income
families.
Many of these programs involve financial counseling for low-
and moderate-income people interested in buying a home and in
return, offer more lenient requirements.
Generally speaking, to qualify for conventional loans, housing
expenses should not exceed 26% to 28% of your gross monthly
income. For FHA loans, the ratio is 29% of gross monthly income.
Monthly housing costs include the mortgage principal, interest,
taxes and insurance, often abbreviated PITI. For example, if your
annual income is $30,000, your gross monthly income is $2,500,
times 28% = $700. So you would probably qualify for a conventional
home loan that requires monthly payments of $700.
Any expenses that extend 11 months or more into the future are
termed long-term debt, such as a car loan. Total monthly costs,
including PITI and all other long-term debt, should equal no
greater than 33% to 36% of your gross monthly income for
conventional loans. Using the same example, $2,500 x 36% = $900.
So the total of your monthly housing expenses plus any long-term
debts each month cannot exceed $900. For FHA the ratio is 41%.
Maximum allowable monthly housing expense
26% - 28% of gross monthly income - Conventional
29% of gross monthly income - FHA
Maximum allowable monthly housing expense and long-term debt
33% - 36% of gross monthly income - Conventional
41% of gross monthly income - FHA
One way to determine how much to spend for housing is to
compare your monthly income with monthly long-term obligations and
expenses. Use the worksheet, "Evaluating Your Financial
Resources," to determine how much money you can spend on housing.
Be sure to only include income you can definitely count on.
When budgeting to buy a home, it is important to allow enough
money for additional expenses such as maintenance and insurance
costs. If you are purchasing an existing home, gather information
such as utility cost averages and maintenance costs from previous
owners or tenants to help you better prepare for homeownership.
Homeowner's insurance or property insurance is another cost you
will have to consider. The lending institution holding the
mortgage will require insurance in an amount sufficient to cover
the loan. However, to protect the full value of your investment,
you might want to consider purchasing insurance that provides the
full replacement cost if the home is destroyed. Some insurance
only provides a fixed dollar amount which may be insufficient to
rebuild a badly damaged house.
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Down Payment Assistance
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The best-kept secret behind the
sustained strength of the residential real estate market is the
creation of a new pool of buyers who can afford their mortgage
payments but lack the cash for a down payment. In the past these
potential buyers had little hope of owning a home. Today,
thousands of these individuals are becoming homeowners.
According to both HUD and Minneapolis Federal Reserve, the
number one barrier to homeownership in the U.S. is the lack of
down payment money. With President Bush's initiative to increase
minority homeownership by 5.5 million by the year 2010, there is
an increased need for organizations that can provide assistance
through the use of private capital.
Through the use of private capital, the non-profit down-payment
industry now makes possible over 17,000 home purchases each month
for low to moderate income buyers. Today these Down payment
Assistance Programs (which are not just for 1st time homebuyers)
are helping many people live the dream of home ownership.
These organizations are supported through contributions made by
home sellers. The donations help to replenish the pool of funds
that are used for future buyers. Additionally the non-profits
charge a small service fee, the proceeds of which allow them to
stay operational.
Buyers are provided with gifts from the non-profits, which can
be used towards their down payment and/or closing costs. These are
true gifts that do not need to be repaid. The grants range from
2%-10% of the purchase price of the home. Home sellers typically
agree to participate because they believe that they are receiving
a fair offer for their home while at the same time they are
benefiting from making a donation to a non-profit organization.
Benefits to Home Buyers
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Get into a home |
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Begin building equity |
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Start taking advantage of tax benefits |
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May not have to deplete their entire savings |
Benefits to Home Sellers
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Expose their home to a larger pool of buyers |
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Typically will receive full price offers |
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Sell their home faster |
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Added benefit of making a donation to a non-profit |
The organizations differ slightly with some providing
additional benefits for the homebuyer. For instance the Home Down
payment Gift Foundation has a program called "Home Mortgage
Protection Plus". This Program covers gift recipient who are
enrolled in the Platinum Program against involuntary loss of
employment. Should the gift recipient(s) lose their job during
their first year of home ownership, the Foundation will provide
for up to six months of mortgage payments (maximum of $1800.00 per
month in P.I.T.I.) on their behalf.
The non-profits strongly encourage Home Ownership Counseling
prior to the home purchase and some provide post-purchase
counseling to its gift recipients.
The Gift Programs generally participate with FHA, Conforming,
and Non-Conforming Loan Products. The down payment assistance
program can be used for Single Family (1-4 unit) homes,
Manufactured/Modular Homes, Condominiums, Townhouses, Existing or
New Construction, Rehab and Non-Conforming.
While they do not provide any lending services, they can make
available local mortgage professionals who are familiar with their
Program. For more information about these programs you can contact
the Home Down payment Gift Foundation at 1-888-856-4600 or
visit their website at www.homedownpayment.org.
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State Housing and Finance
Authorities |
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Alabama Housing Finance Authority
P.O. Box 230909
Montgomery, AL 36123-0909
(334) 244-9200
(800) 325-AHFA (2432)
Alaska Housing Finance Corp.
P.O. Box 101020
Anchorage, AK 99510-1020
(907) 330-8447
(800) 478-2432 (outside Anchorage, but within Alaska)
Arizona Department of Commerce Office of Housing
Development
3800 N. Central Ave., Suite 1500
Phoenix, AZ 85012-1991
(602) 280-1300
(800) 528-8421 (Toll free in Arizona)
Arkansas Development Finance Authority
100 Main Street / Suite 200
Little Rock, AR 72201
(501) 682-5900
California Housing Finance Agency
1121 L Street
Sacramento, CA 95814
(916) 322-3991
California Department of Housing & Community Development
P.O. Box 952050
Sacramento, CA 94252-2050
(916) 445-4782
Colorado Housing and Finance Authority
1981 Blake Street
Denver, CO 80202-1272
(303) 297-2432
(800) 877-2432
Connecticut Housing Finance Authority
999 West Street
Rocky Hill, CT 06067-4005
(860) 721-9501
Delaware State Housing Authority
Division of Housing and Community Development
18 the Green
Dover, DE 19901
(302) 739-4263
DC Housing Finance Agency
815 Florida Avenue, N.W.
Washington, DC 20001
(202) 777-1600
Florida Housing Finance Corporation
227 North Bronough Street / Suite 5000
Tallahassee, Florida 32301-1329
(850) 488-4197
Georgia Residential Finance Authority
60 Executive Park South, N.E.
Atlanta, GA 30329
(404) 679-4840
Hawaii Housing Authority
1002 North School Street
P.O. Box 17907
Honolulu, HI 96817
(808) 848-3277
Idaho Housing Agency
P.O. Box 7899
565 W. Myrtle
Boise, ID 83707-1899
(208) 331-4882
Illinois Housing Development Authority
401 N. Michigan Avenue / Suite 900
Chicago, IL 60611
(800) 942-8439
(312) 836-5200
Indiana Housing Finance Authority
115 West Washington St., #1350, South Tower
Indianapolis, IN 46204
(317) 232-7777
(800) 872-0371 (Toll free in Indiana)
Iowa Finance Authority
100 East Grand Avenue / Suite 250
Des Moines, IA 50309
(515) 242-4990
(800) 432-7230
Kansas Office of Housing Department of Commerce
1000 S.W. Jackson Street, Suite 100
Topeka, Kansas 66612-1354
(785) 296-3481
Kentucky Housing Corporation
1231 Louisville Road
Frankfort, KY 40601-6191
(502) 564-7630
(800) 633-8896 (Toll free in Kentucky)
Louisiana Housing Finance Agency
200 Lafayette Street / Suite 300
Banton Rouge, LA 70801-1203
(225) 342-1320
Maine State Housing Authority
353 Water Street
Augusta, ME 04330-4633
(207) 626-4600
(800) 452-4668
Maryland Department of Housing and Community Development
100 Community Place
Crownsville MD 21032-2023
(410) 514-7000
(800) 756-0119 (Toll-Free in Maryland)
Massachusetts Housing Financing Agency
One Beacon Street
Boston MA 02108
(617) 854-1000
Michigan State Housing Development Authority
735 E. Michigan Ave
P.O. Box 30044
Lansing, Michigan 48912
(517) 373-8370
Minnesota Housing Finance Agency
400 Sibley Street, Suite 300
St. Paul, MN 55101
(651) 296-7608
(800) 657-3769
Mississippi Home Corporation
735 Riverside Drive
Jackson, MS 39202
(601) 718-4642
Missouri Housing Development Commission
3435 Broadway
Kansas City, MO 64111-2415
(816) 759-6600 |
Montana Board of Housing
P.O. Box 200528
301 S. Park Ave.
Helena, MT 59620-0528
(406) 841-2840
Nebraska Investment Finance Authority
200 Commerce Court,
1230 "O" Street,
Lincoln, NE 68508-1402
(402) 434-3900
(800) 204-6432
Nevada Department of Commerce Housing Division
1802 N. Carson Street / Suite 154
Carson City, NV 89701
(775) 687-4258
New Hampshire Housing Finance Authority
P.O. Box 5087
Manchester, NH 03108
(603) 472-8623
New Jersey Housing Agency
637 S. Clinton Ave.
P. O. Box 18550
Trenton, NJ 08650-2085
(609) 278 - 7400
Mortgage Finance Authority
344 4th Street SW
Albuquerque, NM 87102
(505) 843-6880
(800) 444-6880 (Toll free in New Mexico)
State of New York Division of Housing and Community
Renewel
One Fordham Plaza / 2nd Floor
Bronx, NY 10458
(718) 563-5678
New York State Housing Authority
641 Lexington Avenue
New York, NY 10022
(212) 688-4000
(800) 382-4663
North Carolina Housing Finance Agency
3508 Bush Street
Raleigh, NC 27609-7509
(919) 877-5700
North Dakota Housing Finance Agency
1500 East Capitol Avenue
PO Box 1535
Bismarck, ND 58502-1535
(701) 328-8080
(800) 292-8621 (Toll free in North Dakota)
Ohio Housing Finance Agency
57 East Main Street
Columbus, Ohio 43215-5135
(614) 466-7970
Oklahoma Housing Finance Agency
P.O. Box 26720
Oklahoma City, OK 73126-0720
(405) 848-1144
(800) 256-1489
Oregon Housing Agency Housing Division
1600 State Street
PO Box 14508
Salem, OR 97309-0409
(503) 378-4343
Pennsylvania Housing Finance Agency
2101 North Front Street
Harrisburg, PA 17105-8029
(717) 780-3800
Rhode Island Housing and Mortgage Finance Corp.
44 Washington St.
Providence, RI 02903-1721
(401) 751-5566
South Carolina State Housing Financing and Development
Authority
919 Bluff Road
Columbia, South Carolina 29201
(803) 734-2000
South Dakota Housing Development Authority
404 James Robertson Parkway, Suite 1114
Nashville, Tennessee 37243-0900
(615) 741-2400
Tennessee Housing Development Agency
404 James Robertson Parkway, Suite 1114
Nashville, Tennessee 37243-0900
(615) 741-2400
Texas Housing Agency
P.O. BOX 13941
Austin, TX 78711-3941
(512) 475-3800
Utah Housing Finance Agency
554 S. 300 E.
Salt Lake City, UT 84111
(801) 521-6950
(800) 284-6950 (Toll free in Utah)
(800) 344-0452 (Outside Utah)
Vermont Housing Finance Agency
P.O. Box 408
Burlington, VT 05402-0408
(802) 864-5743
Vermont State Housing Authority
One Prospect Street
Montpelier, Vermont 05602
(802) 828-3295
(800) 820-5119 (Message Line)
Virginia Housing Development Authority
601 S. Belvedere Street
Richmond, VA 23220
(804) 782-1986
(800) 968-7837
Washington State Housing Finance Commission
1000 Second Avenue, Suite 2700
Seattle, WA 98104-1046
(206) 464-7139
(800) 767-4663 (Toll free in Washington State)
West Virginia Housing Development Fund
814 Virginia Street East
Charleston, WV 25301
(304) 345-6475
Wisconsin Housing and Economic Development Authority
201 W. Washington Ave., Ste. 700
P.O. Box 1728
Madison, WI 53701-1728
(608) 266-7884
(800) 334-6873
Wyoming Community Development Authority
155 North Beech
.phper, Wyoming 82602
(307) 265-0603 |
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