Home Mortgages: Qualification When Your Down Payment is Small
If you don't have a lot saved for a down payment to purchase a home, a lender will want some protection against a loss in case you default on the mortgage.
Here are your options:
Private Mortgage Insurance, Borrower Paid
Private mortgage insurance, or PMI, covers some of the lender's loss if you can't pay your mortgage. Monthly PMI premiums vary between 0.5 and 1.5 percent of your annual loan amount. Use a PMI Calculator to see an amortization schedule showing monthly PMI payments.
Lenders must cancel PMI once you've paid down your mortgage to 78 percent of the purchase price. Keep track of your loan and contact your lender's customer service department when you are close to reaching that threshold. To learn more, see HSH.com's Homeowner's Guide to PMI.
Private Mortgage Insurance, Lender Paid (LPMI)
Instead of requiring you to pay for PMI, a lender may charge you a higher interest rate to pay for the loan guarantee. This may produce a lower monthly payment than you would have if you paid for the PMI yourself; however, the higher interest rate stays in effect until you sell the house or refinance the loan. Unlike MI, you can't cancel it.
The FHA guarantees loans for first-time buyers with a down payment as small as 3.5 percent. For most FHA loans, you pay 1.75 percent of the loan amount at closing and 0.5 percent in monthly premiums for the loan guarantee. In most cases, the FHA MI is automatically canceled after 15 years. Check HSH Associates FHA/VA Lender Showcase to get rate information.
Veterans and military service people, as well as their spouses, are eligible for VA loans. No down payment is required for VA loans up to $417,000 in most areas of the country, and up to higher values in expensive housing markets. Like the FHA, the VA provides a loan guarantee, so lenders are willing to loan money to qualifying borrowers, even if they have very little to put down. Although you don't have to pay for private mortgage insurance, you do have to pay a funding fee, which ranges from 1.5 to 3.3 percent of the loan.
To find the best mortgage deal, use HSH.com's mortgage calculators to research and compare alternatives for financing with a low down payment.