Buying a primary home? The 20% down rule is yesterday’s news. More down payment options exist, including both government and private sector alternatives, allowing more flexible choices. Don’t be fooled however, as most of the programs that allow for less than 20% down include PMI, an added premium built into the mortgage payment. If you don’t have 20% down to buy a home, and you want to avoid PMI, pay close attention…
Quick Cheat Sheet On PMI
PMI, otherwise known as private mortgage insurance is a percentage of the loan amount added to the house payment. On common FHA Mortgage types, 135 basis points of the loan amount on an annualized basis, is the premium. For example a loan amount $400,000 is $450 per month in PMI (excluding principal and interest, insurance or property taxes).
Looking at conventional mortgages, PMI can range from anywhere from 3o to 120 basis points. More commonly, expect an average PMI to be approximately 50 basis points of the loan amount. Using our 50 basis points example on a loan of $400,000 that’s $166 per month in PMI.
The Old School 80/10/10 Is Back
Popularized in the lending heyday from 2004 2007, the program allows for a buyer to put down just 10% of the purchase price of the home. In most cases, a 10% down payment would require monthly PMI. Using the 80/10/10 approach, your lender would provide 80% first mortgage, that same lender and/or a subsequent lender would provide a 10% second mortgage in lieu of the monthly PMI, while you contribute the 10% down payment, sealing the deal.
Key tips: most lenders will allow for secondary financing up to 90% combined loan-to-value (combined loan-to-value meaning first and second mortgage combined loans) up to the maximum county conforming loan limit in which the property is located. While the majority of mortgage lenders typically do not offer second mortgages, smaller pocket-size lenders are entering the marketplace aggressively with the 80/10/10 solution. Plan on having at least a 700 credit score and 10% down of your own funds. *Some lenders may even still allow a 10% to be gift funds, do check with a qualified mortgage professional.
Prepaid Private Mortgage Insurance
Alternatively, rather than electing the monthly payment option , a buyer with as little as 5% down can chose to prepay the mortgage insurance upfront in a one-time premium called single pay mortgage insurance. Not all lenders offer it, so buyers would be best served doing their comparative shopping. The program works by simply pre-paying a chunk of the future pmi payments upfront as a fee at the closing table. This can be anywhere from 1.75 to 3% of the loan amount.
Key tips: like the 80 10/10 program, a 700 credit score would be required and the single pay mortgage insurance amount can be gifted.
Gift Of Equity
Do you live in a family owned property? May you have the ability to purchase the property you rent from your landlord? In either instance, the owner of the property whether that be a personal family member or a landlord for example can provide a gift of equity for at least 5% of the purchase price as well as for closing costs and single-pay mortgage insurance. A gift of equity is simply the seller of the property providing funds for the benefit of the buyer and accepting less net proceeds at closing.
Key tips: lenders going to require a letter of motivation on why the family member or the landlord is selling their property to a buyer to whom they have a personal relationship with. There could be a variety of reasons so it’s crucial to make sure the structure is properly reviewed by a qualified mortgage professional. This letter of motivation will address what’s called a non-arm’s length transaction occurring when there is relationship between the buyer and seller, lender places more scrutiny on transactions with this in place due to potential fraud for profit schemes.
Deal Sweetens For Military Veterans
Have previous military experience with a general or honorable discharge? The Department of Veterans Affairs allows eligible veterans with a certificate of eligibility from the VA (shows their loan eligibility) to purchase a home with no money down as well as no monthly PMI, with loan sizes even as high as $1,050,00 in some high cost areas. Sonoma County, CA for example has a max loan limit at $520,0950.
Key tips: eligible veterans will typically pay a 2.15% guarantee fee of the loan amount Department of Veterans Affairs which is added to the loan amount and then re-amortized over the term of the loan. For example on a loan of $500,000, that’s $10,750 added to the loan amount making the financed loan amount $510,750, still most attractive compared to a PMI premium on another program.
If you plan to buy a house in the near future, these possibilities represent a tangible alternative to simply putting down funds and taking PMI on a monthly basis. While you might elect to do that anyway, PMI depending on the loan program, maybe removed in the future. Check with your lender on pmi removal as the specific characteristics tied to your initial down payment, and mortgage loan program, may differ.
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