Many homebuyers confide in real estate agents and loan officers to find them the best price. But 95% agents don’t understand the value of knowing about all of the low down payment options available to their clients, says Gauri Nerurkar, Realtor DC Metro Homes Team of RE/MAX.
In fact, in a recent post for mortgage industry blog, MGIC Connects, that out of the most recent NAR Profile of Buyers and Sellers states, 40% of repeat buyers, and 66% of first-time home buyers, are putting less than 10% down. Understanding all of the low down payment mortgage options available to borrowers and leveraging this information to help them save money has the potential to positively impact your business growth.
Here are 5 reasons why we believe buyers need to know about low-down payment mortgage loans.
1. FHA IS MORTGAGE INSURANCE
Many people think that the Federal Housing Administration (FHA) provides a service that is markedly different than the service private mortgage insurers provide. The reality is both FHA and PMI provide the exact same service, but with some key differences.
2. PMI ALLOWS A BORROWER TO PUT LESS MONEY DOWN
A conventional loan with private mortgage insurance allows for slightly less money for a down payment (as little as 3% down), whereas FHA requires a 3.5% down payment. The ability to use gift funds is another low-down-payment option for borrowers. Many don’t realize that conventional loans with PMI do allow for the use of 100% gift funds.
3. FHA CAN LEAD TO MORE BORROWER DEBT
Even though a borrower may put less down using a conventional loan with private mortgage insurance, they still end up with less debt than borrowers who take out FHA loans. This is because FHA charges an upfront premium along with the monthly mortgage insurance amount. That upfront premium is most often financed into the loan, increasing the total amount borrowed. Keep this in mind when discussing low-down-payment options with borrowers who have higher credit scores, since they stand to gain more by going conventional.
4. CREDIT SCORE MAKES A DIFFERENCE
Most PMI premiums are based on credit scores, meaning the higher the borrower’s credit score, the lower the premium. FHA does not base its premiums on credit score, so borrowers with lower credit scores often find FHA a lower-cost option whereas borrowers with higher scores would save more money by going conventional.
5. FHA MORTGAGE INSURANCE CAN’T BE TERMINATED
One of the biggest concerns for low-down-payment borrowers relying on government mortgage insurance through FHA is that unless the borrowers put at least 10% down, they won’t be able to cancel their FHA mortgage insurance. One of the advantages private mortgage insurance offers is that it is a short-term solution. It is automatically dropped when the loan reaches 78% loan-to-value. Additionally, the borrower can request the private mortgage insurance to be cancelled once the loan reaches 80% of the original value, based on either the actual payments made, or the initial amortization schedule (for fixed rate loans) or current amortization schedule (adjustable rate loans), irrespective of the actual loan balance.
When you know as much as possible about borrowers’ low-down-payment options, you can discuss them with your Realtor and/or your Loan Officer and choose the best option.
Many first time buyers have no idea that going out and buying a car after applying for a home mortgage could end up costing them their dream home!