Considering the possibility of buying a home this year? Contrary to popular belief, you need not have a down payment to get your foot in the door. Tips to avoid monthly private mortgage insurance…
Ways To Get The Keys
What you’ll need: a good credit score, at least 700 credit score or better with a clean payment history, consistent income, a solid two year work history and an ability to afford a mortgage payment.
Conventional Loan With Single Pay Mortgage Insurance
What it is: in order to buy a house with a conventional loan you’ll need at least a 5% down payment. The 5% down payment can come in the form of a gift. No longer do you need to have a minimum down payment contribution. The entire down payment can be a gift, so long as you’re buying a single-family home. Single pay mortgage insurance is a little-known lending perk that simply allows you to pay a portion of the future years’ PMI payments upfront in one lump sum at closing.
How it works: gift money comes from mom or dad or relative- makes up the 5% down payment (5% of sales price of home). The loan is structured asking the seller of the property to pay the closing costs along with the single pay mortgage insurance premium due. If you have strong income that offsets a higher sales price and the house appraises, you’re in. No monthly PMI because it’s paid upfront by the seller along with the rest closing costs, and down payment fund is gifted.
What to remember: closing costs can be usually 2.5% of the sales price and average single mortgage insurance is calculated at 1.75% of the loan amount. Closing costs plus single pay mortgage insurance= needed seller concession for sealing the deal.
Buy A Family-Owned Home Using A Conventional Loan With Single Pay Mortgage Insurance
What it is: you buy a property from a family member with a conventional loan, will still need the 5% down payment, but is a gift of equity, not hard cash. The down payment must be gift of equity because there is a relationship between buyer and seller.
How it works: gift money is provided as a gift of equity from the net proceeds of the sale. In other words, the 5% down comes from the net proceeds after paying off any liens against the property. This is also exactly where the closing costs credit would come from including the single pay mortgage insurance premium which is considered to be a closing cost.
What to remember: in a traditional sale when there is no relationship between buyer and seller it’s called arm’s length – seller in such a situation isn’t permitted to gift down payment funds to the buyer, buyer must obtain those funds from another donor in hard cash.
However, in the family owned property situation, because there is a relationship between buyer and seller- the transaction is considered to be non-arm’s-length and as such, seller can gift the down payment and all closing costs to the buyer (their family member) from the net proceeds of the transaction structured as gift of equity. Such a scenario would also contain no monthly PMI and no cash out of pocket.
Military Veterans Are Also Eligible For Perks
What it is: if you are veteran, and you qualify for the VA guaranteed loan program- allows you to buy a house without putting in any down payment, nor needing gift funds. The program also does not contain any monthly PMI, but in most circumstances will contain an upfront funding fee financed in the loan amount (calculated at 2.15%. of the loan amount). The seller of the property would pay the closing costs for you or you the closing costs could be paid as a gift.
How it works: you make an offer to purchase a home higher than the asking price or whatever asking price you deem it fit and ask for a 2.5% seller concession for closing costs. The seller of the property in an arm’s length transaction (remember no relationship between buyer and seller), receives lower net proceeds, money is then given to you reducing your cash to close on the house.
*Another tip is to ask the lender for a lender credit at closing which also can pay closing fees.
What to remember: VA loans require a full pest report paid for by the seller of the property. In re-sale properties, this can be somewhat limiting as many sellers don’t want to pay for a pest inspection, let alone any subsequent repairs that could follow suit as deemed necessary for correction when working with a VA home buyer.
If you are looking to buy a home, start with receiving a free mortgage rate quote!