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Mortgage Insurance for Low-Down-Payment Loans

Unless you go with a VA loan, the answer is yes. All FHA loans have it. And all conforming loans where the loan amount is greater than 80 percent require it. In other words, on a $100,000 house, if you put less than 20 percent down, you’re probably stuck with paying mortgage insurance.

Mortgage insurance does not protect you. It protects the lender. If you don’t make your payments and the lender has to foreclose on you, the insurance picks up a substantial portion of any loss the lender may incur. That’s why lenders demand it. (That, and the fact that the government requires it!)

Trap-Expect Extra Charges For Mortgage Insurance

PMI (Private Mortgage Insurance) is expensive. Expect to pay an additional 1/2 percent in interest for it. However,once you pay your loan down (or your property appreci­ates) so that your mortgage is less than 80 percent of the value of your property, you can usually get it removed.

Be Creative-Have the Seller Handle the Low-Down-Payment Financing for You

What used to be called “creative ?nancing” is nothing more than having the seller ?nance your purchase. Instead of going to an insti­tution, such as a bank, to get a mortgage, the seller carries back the “paper,” sometimes for the entire price.

However, in order for the seller to do this, he or she must have a substantial equity in the property. Often this is the case with retirees who are downsizing. They want to get a smaller home and often have their existing home paid off, or close to it.

While they may need some cash, often they come out of the sale with a lot of extra money, which they then put into the bank or CDs to earn interest. However, if interest rates are low, they are in for a hard time. Until you offer to borrow the money from them as part of the purchase. While the bank may pay 1 to 5 percent, you can easily pay 6 to 10 percent, depending on market conditions. For a seller who is looking for income from cash, you can be a godsend.

Often these seller-?nanced sales are constructed with two mort­gages. You go out and get a conventional ?rst mortgage for up to 80 percent of the sales price. (These are relatively easy to obtain.) Then the seller lends you an additional 10 to 20 percent to cover what oth­erwise would be your down payment.

Pluses of Seller Financing

• It’s almost instantaneous-no waiting for a lender to fund.
• Little qualifying-Most sellers only want to see a credit report showing relatively good credit.
• High LTVs (Loan to Value)-Often a seller will give you the top 5 to 20 percent that would otherwise be your down payment.

Minuses of Seller Financing

? Sometimes hard to ?nd a seller with enough equity who doesn’t need to cash out (to buy another property).

? Sellers may be wary-If you don’t make the payments, they would need to foreclose, and their lack of experience and knowledge makes that dif?cult.

Trap-Lender’s Restrictions

Much of the “no money down” nonsense that was popu­larized in real estate in the 1980s involved having sellers carry back all the down payment. The sellers were placed at a real disadvantage in terms of collateral. Today, with a hot market, few sellers will do this. In addi­tion, institutional lenders may restrict their mortgage amount unless you put down at least some of your own money.

Other Sources for the Down Payment

It would be nice if we could simply write out a check for the down payment, if we can’t get 100-percent ?nancing. However, most of us are always pressed for cash. Other than a ?ush checking or savings account, here are some sources of cash for a down payment that you may not have considered before.

Alternative Possible Sources of Down Payment

? Cash value of life insurance (borrowing on it may be inadvis­able-check with your ?nancial advisor ?rst)

? Re?nancing or selling an auto or boat

? Sale of other physical assets to generate cash

? Sale of stocks, bonds, or other securities (?rst check with your ?nancial advisor)

? Sale of present home

? Gifts or loans from relatives or friends

? Re?nancing investment real estate you already own (should be done before applying for the new loan)

? Income tax refund

? Letter of credit or credit line from a bank (should be obtained before applying for the loan)

? MasterCard, Visa, or other credit card (should be obtained before applying for the loan)

? “Sweat equity”-offering to ?x up a house in return for a reduced down payment

? Accumulation of funds from your regular income between date of purchase and close of escrow (insist on a long escrow-three months or more)

? Personal loan on hobby materials, jewelry or furs, cameras, or other property.

Trap-Beware When Borrowing The Down Payment

Many of the sources of cash listed involve borrowing. However, many loan programs restrict the borrowing of funds for a down. (Not all-some Fannie Mae and Fred­die Mac programs speci?cally allow it.) Be sure to check with what your lender requires. If you do borrow your down payment, it’s a good idea to borrow it at least three months before you enter into a transaction to purchase a home. That way, you’ll have the cash in hand and bor­rowing will show up as an existing loan against your credit, not new borrowing speci?cally for the home, which could disqualify you.

It’s important to be aware that an extra loan against your credit could decrease the amount you could borrow on a home. (You will be tying up some of your income to pay off that loan. That income won’t be available to help you qualify for a home mortgage.)

[tags]Mortgage Insurance, Low-Down-Payment Loans[/tags]