Buying a Home? You’re in Luck!
In the market for a new home? You’re not alone. According to Realtor.com, existing-home sales increased in the third quarter despite the ongoing inventory shortages, consequently driving home prices up in most of the country. Therefore, it comes as no surprise that NAR Chief Economist Lawrence Yun believes there is no question that the housing market had its best quarter in nearly a decade. Home prices rose above levels of the 2006-2007 housing bubble, yet experts like Yun say Americans should not be concerned about another crash.
So it’s time to buy. Luckily, several options exist today that allow borrowers with good credit to buy a home with little or zero down, as long as they meet other underwriting requirements. And companies like Credit Sesame are here to provide you with the tools you need to make sure you are in the best credit position possible before you take the plunge into the real estate market.
Low Down Payment Loan Options
Until recently, the FHA loan was the best option for home buyers who wanted to purchase a home with a small down payment. However, in the past six months, Fannie Mae and Freddie Mac have introduced new alternatives to the FHA.
With an FHA loan, borrowers need a down payment of at least 3.5 percent, but the qualifications are less stringent than they are for the Fannie Mae and Freddie Mac 3 percent programs. For example, borrowers don’t have to meet income level requirements or be first-time homebuyers to qualify, and the borrower’s credit score can be as low as 580.
FHA borrowers must pay a private mortgage insurance (PMI) fee up front (1.75 percent of the full amount of the loan) and a monthly PMI fee, which insures the lender in case of default. To compete with Fannie and Freddie, FHA recently lowered its monthly PMI payment from 1.35 percent to 0.85 percent of the full loan amount on 30-year fixed mortgages for borrowers who make a down payment of 5 percent or less. With an FHA loan, PMI payments last for the life of the loan.
Borrowers with higher credit scores will pay less, overall, for the new Fannie Mae and Freddie Mac loans.
Fannie Mae has two 3 percent down options: its standard 97 percent loan or the My Community Mortgage. Both were introduced last December as alternatives to the FHA, and both loans are available to first-time home buyers only (at least one co-borrower must not have owned a home in the past three years). Fannie Mae requires a credit score of at least 620, and borrowers may not exceed certain income limits.
Unlike Fannie Mae, Freddie Mac’s new 3 percent down program is available to repeat buyers with low and moderate income levels, in addition to first-time home buyers. However, Freddie Mac’s programs are similar to Fannie Mae’s in other ways.
1. Home Possible, which became available last December, requires a 5 percent down payment for buyers in the market for a 1 to 4-unit primary residence, including a house, condo, PUD (planned unit development) or manufactured home.
2. Home Possible Advantage, Freddie Mac’s 3 percent down loan, became available in March, and only those purchasing a 1-unit primary residence are eligible. Borrowers must have at least a 660 credit score, and first-time buyers must participate in a home ownership education program.
With the Freddie Mac and Fannie Mae 3 percent down loans, borrowers can choose either to pay one upfront PMI fee accompanied by a slightly higher loan interest rate, or a monthly PMI fee that stops when twenty percent equity is achieved. Freddie Mac and Fannie Mae both allow gifts and grants to be included in the down payment.
One of the key considerations for most home buyers is understanding how to get the lowest mortgage interest rates with the most favorable terms for their current situation. There are so many loan programs out there now for first time buyers it makes sense to do research to find the best options.
Down Payment Assistance
What about down payment assistance? Otherwise creditworthy borrowers who seek assistance with the down payment will find options that vary state-by-state and county-by-county. Many of them come in the form of a second loan, which means the borrower will need to again meet loan guidelines, but repayment plans are generally designed to be non-burdensome.
For example, California borrowers who qualify can take out a CHDAP loan, which covers a down payment up to 3 percent of the purchase price and requires no payments until the primary mortgage is paid off or the home is sold (simple interest accrues).
The CalPLUS FHA loan is a similar piggyback loan program in which the junior loan covers a down payment of up to 3.5 percent, but the interest rate is zero.
Qualified Arizona borrowers can apply for the Home Plus home loan program, which includes a grant (non-repayable) of up to 5 percent to assist with the down payment and closing costs.
Google “[your state] down payment assistance” to find programs available in your area.
Borrowers take note:
● The higher the down payment, the lower the monthly payments
● The higher the borrower’s credit score, the lower the loan’s interest rate
● Some lenders will not approve a first mortgage that uses a second mortgage for a down payment
● Some lenders maintain stricter lending guidelines than those outlined by these programs
Finding the Right Mortgage Loan
Finding the right loan is no easy task. With teaser mortgage interest rates and monthly savings across the web, how do you know if the mortgage rate you are applying for really fits with your credit profile and your budget?
First things first, you need to know your credit score. Your credit score determines whether or not you can get approved for a loan, and at what interest rate. The higher your credit score, the lower the interest rate you will receive.
Next, you need to look at your credit report. Lenders want to see candidates that have low debt balances, a long history of timely payments, and varied credit utilization. Ideally, you will obtain your credit report from all three agencies (TransUnion, Experian, and Equifax) to compare.
It is imperative that you do this one year prior to buying a house so that you can look over your credit reports to make sure there are no errors. This way, even if you find errors, you will have ample time to correct them.
While varying interest rates between borrowers with different credit scores may seem minuscule (ranging from 0.1-1.5%) they actually make a significant difference. See the following chart which compares interest rates for a $250,000 30 Year Fixed Mortgage.
So once you know your credit score, how do you go about finding the best loan for you? Credit Sesame’s analytics engine analyzes your credit history and debt picture against national lender mortgage rates to find you personalized mortgage offers for which you actually pre-qualify, suite your budget and are best matched with your financial goals. Once you have the perfect mortgage plan for your needs a pre-approval will be put in place. If you are shopping for a home this will let home sellers and real estate agents feel confident in your ability to purchase.
During the process of getting the loan you will want to make sure your finances remain in order. There is nothing more unpleasant than finding your mortgage pre-approval letter has been denied due to some kind of change in your qualifying ratios. It is important not to make any big purchases during the loan process as this is the main causes of mortgage denial. Best of luck in your future home purchase!
Author Bio: This article was researched and written by the Credit Sesame Financial Research team. Credit Sesame is a personal finance website that helps users do more with their credit score and manage their loans. They offer tools and tips to manage personal finance and loans