If this is your first time purchasing a home and don’t have enough money for a downpayment, then you might consider a downpayment assistance program for first time home buyers.

Your Down payment plays a huge role in financing your home purchase.  It’s the portion of your property’s purchase price that you must pay up-front to the lender out of your own verified money. The amount that you put down can determine how much you are able to borrow, the size of your monthly mortgage payments, and the amount of cash that you have available for other home buying costs.

From a lender’s perspective, the greater the downpayment, the greater your stake in the home, and the less risk you are of a possible foreclose on your property later on. Even though most lenders are insured against losses from foreclosures, it still costs them money if you default on your mortgage. Lenders with many foreclosures run the risk of having to pay higher insurance premiums.

It turns out that buyers who invest at least a 20% down payment are significantly less likely to default on a mortgage and walk away.  This makes sense, if you think about it:

• If you have enough for a 20% down payment, you show that you can manage your finances and save money
• With more of your own money invested in the house, you have a lot more to lose if you default on the loan
• A bigger down payment means you borrow less money, so your monthly payments are smaller, and therefore, less of a burden on your budget

Don’t have 20%? If you can’t put 20% down (and most first time buyers can’t) the lender requires you to get a third-party to guarantee the loan.  There are a variety of commercial and government programs that will do this.

Commercial Programs

Most first time buyers use a commercial program to guarantee their mortgage. It is fairly easy to qualify for these programs, but they can be expensive. Here’s a look at two common options:

1. Private Mortgage Insurance (PMI) You can pay an insurance company to insure the mortgage. If you default, they pay the lender what you still owe on your loan.Many PMI policies have a large, up-front cost. This fee ranges from one month’s payment to a year’s worth of payments collected at closing by the lender and paid to the insurer, and two month’s worth of premiums held by the lender as a reserve.Typically, you can drop PMI coverage when you have at least 20% equity in your home. Make sure to read your contract to see if this is allowed under your agreement since some lenders require the insurance for the life of the loan.You should track your PMI policy over time. When you approach the 20% equity level, contact the lender to see what the requirements are for dropping coverage. Some lenders require an appraisal, paid for by the borrower, showing at least 20% equity, or similar proof. Try to get confirmation of termination policies in writing when negotiating the loan.
2. Piggy Back Loans: 80-10-10/75-15-10 Lenders are happy to lend you 80% of the purchase price when you can come up with the 20% down payment. If you can’t put that much down, they may lend you 90%, but they are taking a greater risk and therefore require you to pay a higher interest rate.

80-10-10

Rather than just giving you a loan for 90% of the purchase price at a slightly higher rate, you could get two loans. The first loan is for 80% at a standard rate, and the second, “piggy back” loan, is for 10%, but it has a much higher rate (often more than two points higher than the 80% loan).  The second loan is usually a balloon loan, with the balloon payment due within the first 10 years of the loan.

75-15-10

If you’re borrowing less than $240,000 (a conforming loan) on the first loan, you might want to consider a 75-15-10. It offers a conforming rate rather than the jumbo rate you automatically get with an 80-10-10.

PMI vs. Piggy Back Loans

A lot of borrowers hear that they should avoid private mortgage insurance (PMI) at any cost. Paying high interest, however, isn’t much better than paying for insurance.  You need to make sure that you would actually save money with an 80-10-10 or 75-15-10. The high interest rate may end up costing more than your insurance premiums.

We recommend getting a quote for both. You can then compare the monthly interest on the 10% or 15% loan to your monthly mortgage insurance premium.

Government Programs

There are a number of state and federal programs designed to help people make a down payment.

• FHA Loans With FHA loans, you can put as little as 3% down, but there are lots of limitations on who qualifies.There are several benefits to getting a FHA loan:
  • Requires a down payment of only 3%
  • No prepayment penalty
  • Lenient qualifying guidelines

  To be eligible for an FHA loan, you must:

• Intend to occupy the home you’re purchasing (not renting it out or using it as a vacation home)
• Have a satisfactory credit history
• Borrow less than $151,725 (amount varies by area)

• VA Loans If you’re a U.S. military veteran, you may not have to make a down payment. For a fee, the federal government will guarantee your loan as long as it falls within limits.   If you are a U.S. military veteran, a VA loan is a great way to buy a new home without making a large down payment.There are several benefits to getting a VA loan:
• • No down payment required
  • No monthly mortgage insurance required
  • Free personal loan counseling from the VA

  To be eligible for a VA loan you must:

  • Be a veteran of the U.S. military
  • Intend to occupy the home you’re purchasing (not renting it or using it as a vacation home)
  • Have a satisfactory credit history
  • Have sufficient income to cover the monthly mortgage payments
  • Borrow less than $184,000

  To get a VA loan, you must pay a fee to the VA. The amount is based on the down payment amount and whether you served full-time, in the reserves or the National Guard.

• FmHA Loans In rural areas, the Rural Economic and Community Development (formerly the Farmer’s Home Administration, FmHA) offers direct mortgage loans to buyers who fall within some relatively strict guidelines.This program is a straight government subsidy, with money allocated to local offices on a quarterly basis.The office processes the mortgage application as soon as you apply, generally before you’ve found a house, and then notifies you when the money becomes available.  Depending on the area, some offices will have money available immediately; others will have a waiting list up to several months long.The program targets buyers who can’t get financing elsewhere, generally with low family income, and bases the mortgage payment structure on that income.To learn more about FmHA loans, and to find a lender that offers them, contact your local housing authority.