“20 percent.” If you have researched the home loan process, you have likely heard the number 20% and the term “down payment” used in the same sentence. Conventional wisdom (for the conventional loan program) says that a 20% down payment is required to close on a home loan. For a $400,000 home, the 20% down payment would require $80,000 in cash. This is a large chunk of change, an amount of cash that some buyers are unable – or unwilling – to access.
In reality, the 20% number is simply a guideline. Given the right conditions and the right loan, borrowers can pay as little as 0% down to close on a loan. In this article, we will go over the low- and no-down payment options for borrowers in San Luis Obispo County, the Central Coast, and California.
Lenders are in the risk minimization game. The safer the borrower, the better terms the lender offers (read: a lower interest rate).
The 20% down payment means that the lender’s total investment covers 80% of the purchase price. For the hypothetical $400,000 home, this “loan-to-value” (LTV) of 80% requires a $320,000 investment from the lender, and an $80,000 down payment for the borrower.
The borrower may request higher loan-to-value coverage from the lender to reduce his/her initial down payment. A LTV of 90% on a $400,000 loan, for example, would require $40,000 down.
However, the lender is taking on more risk by covering a larger percentage of the loan. Borrowers with less equity are statistically more likely to default on the loan repayment. To compensate for the risk, the lender requires mortgage insurance, which is added on top of the interest rate to increase the monthly payments.
So in exchange for providing less money up front, the borrower must pay the lender more money over the life of the loan. The tradeoff might be determined beneficial for the borrower with less ready cash.
When the borrower reaches 20% equity, he/she may refinance out of the loan and eliminate the mortgage insurance payment to reduce their monthly payment.
The National Housing Act of 1934 created the Federal Housing Administration (FHA) to help first-time buyers and mid- to low-income Americans purchase a home.
Today, the U.S. Department of Housing and Urban Development (HUD) insures FHA loans. The loan provides low down payment options to prospective buyers that would marginally qualify under industry standard loans.
To protect itself and compensate for riskier loans, the FHA requires both an annual “mortgage insurance” payment (MIP) and an “upfront insurance premium” (UFMIP), which increases the cost of monthly payments.
The mortgage insurance fee varies based on loan term and loan-to-value. On April 1, 2013, HUD altered its fee structure. Click here to learn more about FHA fees.
Backed by the U.S. Department of Agriculture’s Rural Development Administration, the USDA loan aims to improve the quality of life and economy in rural areas.
The USDA loan offers an unparalleled bargain for mid- to low-income buyers in “rural” areas – of which much of San Luis Obispo County qualifies. Qualification for the USDA loan is limited by income (up to 115% of median area income) and town size.
The USDA loan requires a funding fee equal to 2.0% of the total loan, and a minimal 0.5% monthly mortgage insurance payment.
The VA loan offers beneficial terms for veterans and their families. VA borrowers are offered 100% financing for loans up to $417,000. Aside from the typical closing costs/fees, the veteran also must pay a financing fee worth 2.15% of the loan amount.
In addition to down payment, borrowers can also expect to pay out-of-pocket for fees associated with closing the loan. We have estimated that each loan costs about $3,000 for the borrower, with the actual out-of-pocket payment varying based on the mortgage rate. Read More.
Home loans are available in all shapes and sizes for all kinds of borrowers. To help borrowers qualify, we offer lenient down payment, debt-to-income, and credit score guidelines.
“On the bubble” buyers can especially benefit from our loan programs and mortgage expertise. Give us a call at 805.543.LOAN or email us here to set up a pre qualification appointment! You might be surprised to learn just how accessible a home purchase can be.
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When you register for a Loan Center account, you can submit a loan application online and the sensitive information that you provide will be transmitted securely.
Kick your feet up while we crunch the numbers. Pre-approval can be done very quickly if you provide a complete and accurate loan application and supporting documentation.
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