Alternatives to Low Down Payment for Chicago Area Home Buyers
11th April 2014
Have a young new family? The chances that you have 20% to put down on the purchase of a home aren’t very likely. Without a large sum of money, non-veterans will be heading to the FHA (Federal Housing Administration) for their mortgage, or paying for private mortgage insurance on a conventional loan. Both of these options definitely have their drawbacks one of which being that the fees are substantially high and the hikes in FHA fees have only made the outlook grimmer.
Taking a look at different options and government programs for borrowers without large bank accounts can offer some hope. People who have less than 5 percent to put towards their down payment or people with bad credit probably won’t be able to obtain a conventional loan. So for them, FHA is the way to go. FHA’s mission is to get people with a small savings and bad marks on their credit into a home. FHA will accept a down payment as low and 3.5 percent and a credit score as low as 580. (Many lenders, however, will require a higher score.) One of the many differences FHA borrowers will find is that they can use gifts, rather than money from their savings, to put toward a down payment.
Compared to a conventional loan, the FHA will accept lower income borrowers. “If all your monthly debt payments make up more than 43 percent of your income, you’re probably stuck with FHA, says John Frank, president of Paramount Mortgage in Creve Coeur, MO. On the downside, the FHA fees used to be a lot more reasonable and are now being jacked up. An upfront fee of 1.75 percent is charged per loan which can be financed into the mortgage. Looking at a loan for $150,000, the fee would be $2,625. On 30-year mortgages there’s a 1.3 to 1.35 percent yearly charge adding about $169 to your monthly payment. With fees like that, a conventional loan with private mortgage insurance might be a better option. If you have a good credit score, good income, and a least 5 percent down you can get a conventional loan. Although, borrowers with low down payment may find themselves shopping around in order to find a lender that’s willing.
Borrowers of conventional loans with less than 20 percent down must pay for private mortgage insurance which will protect the lender if they should default. The price of private mortgage insurance varies with the size of your down payment and your credit score. You are given the option to pay monthly, which would be added to your mortgage payment, or you can just pay upfront. For example, a borrower with a 10 percent down payment and a high 780 credit score would pay 1.27 percent of the loan amount if they paid up front. However, the same borrower with a low 660 score would be paying 2.64 percent. If you decide to pay monthly you would be looking at a payment of about $90 each month for insurance on a $150,000 loan with a 10 percent down payment. Borrowers that pay monthly have an advantage that FHA borrowers do not. They can drop the insurance once amount of the loan drops to 80 percent of the home’s value. This would be a good option for Naperville area home buyers borrowers who are close to having 20 percent for their down payment. If you have any questions, would like a quote or to get pre-approval, give me a call and let me know how I can help.
Let us help you get started in the qualification process and click here for our free pre-qualification form.https://www.myprospectmortgage.com/PThompson/prequalify.asp
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Peter Thompson 630-479-6424
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