Do you have buyers that are wavering as to how to finance their home? There are plenty of low down payment mortgage options that potential homeowners may consider, but deciding which of these options best fit their financial needs can be a bit more difficult. The good news is that with a continuously recovering real estate market, even more of these options are becoming available and they have you to help them make the best decision.
Here are just a few of the current financing options available to your clients and prospects:
0% down – VA and USDA Loans
3.5% down – FHA Loans
5% down – Conforming loans to $417,000
10% down – High Balance Conforming loans to $625,500
10% down – 80/10/10 loan to $1 million
Financing options like the ones mentioned above will be appealing to prospective buyers, because it will allow them to afford a larger home without putting as much down up front. Unfortunately, these options can be more expensive in the long run and it’s important that you keep them informed on what to expect in the years to come.
1. Higher Interest Rates – Explain to your clients and prospects that the mortgage industry follows a risk-based pricing system. This means that as risk for the lender increases, the rates and fees your clients or prospects pay will also increase. A low down payment is a high risk for lenders, which is why FHA, VA and USDA loans apply either an upfront funding fee and/or mortgage insurance. Fannie Mae and Freddie Mac, who back up all conforming loans, will generally charge your clients a higher interest rate and/or fees when they have less than a twenty-five percent down payment. Depending on their credit score and other factors, rates can vary from .125% to .25% higher for a prospective buyer putting down ten percent instead of twenty-five percent.
2. Private Mortgage Insurance (PMI) – If your clients decide to pursue a conforming loan and plan to make a down payment of less than twenty percent, be sure they are aware of the private mortgage insurance that comes along with it. Depending on their loan amount and credit score, they can expect to end up paying a monthly insurance fee of less than $100 to over $300. The good news is that once a homeowner has built up enough equity to where the loan balance is eighty percent of their original purchasing price, they can finally get rid of the mortgage insurance, because it’s not as high risk for the lender.
3. High Variable Rate Loan – For potential homeowners who are seeking out a high balance or jumbo loan and want to avoid a private mortgage insurance payment, explain the 80/10/10 loan program to them. This program will allow them to split the initial loan into two smaller mortgages. These second mortgages carry high interest rates, which typically carry the risk of an adjustable rate and are more expensive than the current market rate.
Sellers generally tend to stay away from potential buyers with low down payments, as someone with a higher down payment will usually have their loan approved faster by a lender. This is especially true in markets where demand exceeds supply and there multiple offers on the table for a single property. This means that your clients should consider making a significant down payment if they plan on going toe-to-toe with other potential buyers.
Be sure to explain that having a twenty percent down payment will definitely help them be more appealing to a seller, but it isn’t a deal breaker, and these are tips just to be aware of when considering purchasing a home. To help them get a better idea of what kind of home they can afford, share the Homes.com Mortgage Calculator and the First-Time Homebuyer Mortgage Checklist. Furthermore, check out Homes.com featured mortgage expert, Shashank Shekhar, to find more mortgage-related articles like this.
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