Home buyers concerned that rising housing prices are forcing them out of the market can take heart from a recent development: 5 percent down payment mortgages are back. Since the mortgage market crash of 2008, low down payment and no down payment mortgages practically disappeared. The Federal Housing Administration (FHA) stepped up to handle more home buyers who didn’t have a lot of money to put down.
Many of the home buyers the FHA assisted were first time or lower income mortgagees or those who were attracted by down payments of 3.5 percent for borrowers with FICO scores as low as 580. During the recession, the FHA practically tripled its market share to 15 percent. To protect themselves from mountain home loan losses, banks reverted to a more historical model, requiring buyers to make down payments of as much as 20 percent. Despite falling home prices, this was a requirement that put home ownership out of reach of many.
Rising home prices have made low down payments less of a gamble today. The Federal Reserve Bank has continued its program of quantitative easing, which keeps the interest on money the banks borrow at their near historic lows. Although it’s tough today to find 100 percent mortgage financing, some banks are requiring very little down again.
Compare home loan’s entire cost, not just interest rate
Some mortgage programs are designed to compete directly with the FHA, although you’ll probably need a higher credit score to qualify. When comparing rates, be sure to look at the entire cost of the loan. Last year, the FHA had to request its first taxpayer bailout in its 79-year history. It doesn’t want to go back to Congress with a request for money this June, so the FHA has been raising its premiums and now requires mortgage borrowers to purchase private mortgage insurance for the life of the loan. These changes to the FHA has an adverse effect on mortgages and adds significantly to the cost of a mortgage over a 30-year time frame.
Five percent down-payment mortgages from several lenders
Still, low down-payment home loans offered by the FHA, the U.S. Department of Agriculture and the Department of Veterans Affairs will give you a point of reference, so shop those groups first. Because these loans are backed by the federal government, lenders are usually less stringent than with their own programs. Credit unions, which are nonprofit, offer other potential loan channels to explore as well. Local savings banks might be inclined to take a greater risk. And look into local government programs as well.
Massachusetts’ MassHousing loan program offers affordable mortgages for purchase and rehabilitation to local homebuyers. Borrowers must meet purchase price guidelines and income limits which vary by area. The loans only require 3 percent down of the purchase and rehab costs or of the estimated value after rehabilitation (whichever is less).
Wells Fargo is the largest home loan lender in the U.S. One of its low down payment mortgage programs is in conjunction with Fannie Mae’s HomePath mortgage program on real estate owned (REO) or foreclosed property. It offers several money saving advantages:
- Adjustable or fixed rate mortgages are available.
- No appraisal is required.
- No mortgage insurance is needed.
- 5 percent down payment mortgages are offered for borrowers’ homes
- 10 percent down payment mortgages are offered on property bought for investment.
- Down payments can be from savings, a gift, grant or loan.
If high prices have kept you out of the mortgage market, shop around. You might be pleasantly surprised at how little you need for a down payment these days.