People who are interested in buying a home by availing a conforming mortgage, are required to provide at least 20% of the price of the home as down payment. Prior to the sub-prime crisis, lenders were willing to provide mortgage loans even to borrowers who could not come up with the requisite down payment. Hence, it would suffice to say that lenders believed that home prices would eventually appreciate, and lent money to people, regardless of their ability to make good the amount of down payment. In the aftermath of the sub-prime crisis, mortgage loans with no down payment may still be available, although one must bear in mind that the rules and requirements have become more stringent.
Private Mortgage Insurance
Private mortgage insurance (PMI) is required for all mortgages where the loan to value ratio is 80% or more. In other words, people who are providing less than 20% down payment, are required to purchase insurance that protects the mortgage lender against default. For a regular premium paid by the homeowner, the private mortgage insurer undertakes the responsibility of reimbursing the lender, in case the borrower fails to make good the mortgage payments.
Although PMI existed prior to the sub-prime crisis, the proliferation of foreclosures has almost doubled the PMI default rate since 2007. It's but natural that companies have tightened the eligibility requirements for purchasing PMI.
- The aspiring homeowner is expected to have a credit score of at least 720.
- The debt-income ratio cannot exceed 41%.
- For a long time, the premium on home mortgage insurance was between 0.5 and 1% of the loan amount, but today, the insurance premium has increased significantly.
FHA Insured Loans
These loans typically require the borrower to pay 3.5% of the purchase price of the home as down payment. However, a first time home owner has been given the option of monetizing the anticipated $8,000 tax credit. A number of housing finance agencies are offering tax credit loan programs that allow the borrower to procure a short-term loan that is backed by the anticipated tax credit and secured by a second lien on property (home). This loan can then be used to make the requisite down payment. The short-term loan is repaid after the buyer receives the income tax credit from the IRS. In other words, a homeowner can easily buy a home worth $228, 571 without making any down payment. The biggest advantage of FHA insured loans is that they are available even to people with bad credit.
FHA also allows public school teachers to purchase FHA insured foreclosed homes located in low and moderate income neighborhoods for just 50% of the appraised value. Moreover, the US Department of Housing and Urban Development (HUD) reduces the down payment requirement to just $100, if the home is purchased with an FHA insured home mortgage.
VA Insured Loans
Department of Veterans Affairs guaranteed loans are meant for veterans, active service members, reservists, and members of the Public Health Service. Despite the borrower not making any down payment, the lender is prohibited from obtaining PMI, since the Department of Veterans Affairs guarantees the loan. There are limits on the origination fees and closing costs and a meager funding fee of 2% of the loan amount is required. The funding fee can be further reduced if the borrower chooses to make a 5% down payment.
Prior to the sub-prime crisis, piggyback loans and seller financing were available to people who were interested in purchasing a home without making any down payment. However, today these are no longer feasible.
It's evident that these are still a viable option for people with good credit scores as well as those with less-than-perfect credit. A lease contract with option to buy may also be considered by those who are not interested in the aforementioned options. One should not forget that one is still obligated to make mortgage payments on a regular basis.