Lenders like to see the borrower have some skin in the game. With borrowers upside down on their homes simply mailing their keys back to the bank, and sticking lenders with negative equity rather than toughing out the down market and keeping their homes, lenders now want to know that you’ve got a personal stake in the deal.
By the way … those “no money down” property flippers? The ones who were so obnoxious about six years ago? Yeah, those people and their amateur mortgage brokers are making your lattes at Starbucks now – and sending their tips to a bankruptcy trustee, in many cases.
As such, unless you fall into a couple of special categories, chances are you’re going to have to come up with some cash as a down payment on your home.
Underwriting Standards Have Tightened
Don’t count on trying to get cute. The days of trying to camouflage the fact that you have no personal stake in the property by taking out a piggyback loan to boost your down payment from 3 percent to 10 percent are pretty much over. That didn’t work out well for lenders, and we’re in a back-to-basics market now. “Ever since the collapse, if you will, there’s no real creative financing like there used to be four or five years ago,” says Erick Perpich, a Sacramento-area loan officer with Republic Mortgage.
“I haven’t seen a piggyback loan in years,” echoes Kimberlie Snyder, a Washington, D.C. underwriter with Bank of America, who primarily handles VA and FHA loans. “I know on conventional loans, we don’t do piggies either.”
No Down Payments on VA Loans
You can still do a no-down payment mortgage via a Veterans Administration home loan. This is because the federal government stands behind the nation’s veterans, guaranteeing the lender against loss if the veteran should default on the loan. VA home loans have the additional advantage of allowing the borrower to avoid paying primary mortgage insurance premiums, or PMI. This can easily save a borrower over $1,000 per year in many markets. Otherwise you’d have to pay these premiums until your loan-to-value ratio reached 80 percent.
The downside to VA loans is that normally you cannot discharge this debt in bankruptcy as you can with other kinds of debt.
One alternative no-money-down option you may wish to explore: The USDA Rural Development Loan. This program will allow you to borrow up to 100 percent of the value of the property, if you qualify, just like a VA loan. The program only covers homes in certain designated rural areas. Your family income must fall at or below 115 percent of the median income for your area. Loans are for 30 years at a fixed rate of interest, and you can roll expected repair and improvement costs into the price of the loan. This isn’t a giveaway program: You have to have decent credit to qualify.
Funding for this program tends to run out midway through the fiscal year, though. For best results, try to apply early in the U.S. government’s fiscal year, which begins October 1 every year.
How Much Down Payment is Needed for FHA Loans?
If you obtain your loan under Federal Housing Administration auspices – the so-called “FHA loan,” you may get into a home with just 3.5 percent down. This still means you’ll need $7,000 in cash to put down on a $200,000 house, which can be a tough nut to crack for some borrowers. However, FHA loans come with a handy twist: You can receive your down payment as a gift – say, from parents or a rich uncle – and still qualify for the loan. Your benefactor should be prepared to document the source of funds.
The Federal Housing Administration imposes limits on the loan amount, which vary according to the property’s location. You can check the HUD website to find the FHA loan limit for your area.
The federal government has long allowed state governments and private charities to provide down payment assistance to those who need it. In each case, you may be able to get some or all of your 3.5 percent down payment offset via one of these programs. Your mortgage representative or real estate agent may have more information on programs available in your area.
One insider tip: In both cases – VA loans and FHA loans – you will still have to come up with closing costs, which are frequently 3 or 4 percent of the loan on the buyer’s side. The FHA, however, stipulates which closing costs the buyer can pay and seller must pay the rest. One idea that Snyder, a U.S. Navy veteran, used when buying her own home, is to ask for a 4 percent sellers’ concession. In a buyer’s market, the seller may agree to get the deal to happen. “I got money back at the closing,” says Snyder.
Down Payments for Conventional Loans
A conventional loan, in a nutshell, is any mortgage that doesn’t come with a federal guarantee. We’re back to the 5 percent to 20 percent down payment these days on conventional loans. Specifics vary with the lender and by location, as well as by whether the loan is “conforming,” that is, within the underwriting standards established by Fannie Mae and Freddie Mac, the major mortgage buyers upstream from the lender. As Snyder mentioned, many lenders aren’t buying the piggyback loan solution anymore – conventional borrowers will actually have to pony up real money.
There are advantages to putting more money down: If you can reach the 20 percent threshold, you won’t need to pay PMI. Plus, more home equity helps your credit score, counts as an asset on your balance sheet that you can actually borrow against (if you can qualify when you actually need the money!), and puts you in a better position to rent the property on a cash-flow positive basis if things don’t break your way in the future.
What About Down Payments for Investment Properties?
If the home is not your primary residence or a second home, then you can expect to have to come up with more – at least 20 percent, in most cases, depending on the nature of the property. Lenders require the higher down payment because mortgage insurance typically only covers primary residences. For the best interest rates, think closer to 25 percent or more – plus reserves against the possibility of vacancy.
If you want to hold your property in an IRA, then you will need to come up with at least 35 percent down, plus reserves, advises James Hitt, an advisor in Asheville, North Carolina whose company, American IRA, LLC, specializes in real estate and other nontraditional holdings in retirement accounts. “The less you put down, the greater the risk,” cautions Hitt.