New Information on Loans With Less Than 20% Down

Filed under: Market Comentary, Qualifying for a Mortgage Loan

down paymentThere is more proof that the housing market is continuing to brighten as more home buyers are discovering that they can get conventional loans with less than a 20% down payment.

According to a recent article in USA Today, the only way many borrowers used to be able to get a mortgage with less than a 10% down payment was to go through a government guaranteed loan program like the FHA (Federal Housing Administration).

However, a growing number of lenders are now offering these mortgages without the backing of a government guarantee (which is a conventional loan). According to Zillow Mortgage Marketplace, the number of lenders quoting non-FHA loans with down payments between 5-10% has almost doubled what it was two years ago. When you do the math, that can be a large sum of money. For instance, on a $300,000 loan, a 20% down payment is $60,000 while a 5% down payment on that same loan is only $15,000.

Guy Cecala, publisher of Inside Mortgage Finance says, “For years it’s been FHA or nothing. This shift is a sign that mortgage origination is loosening up.” What borrowers still need to remember though is that they must show a strong credit history and documented income to possibly qualify for this type of loan.

These low down payment loans are due to a few factors.

The first focuses on higher FHA costs. Even though FHA requires only 3.5% down, its annual insurance premiums have more than doubled in the past two years. Cameron Findlay, chief economist at Discover Home Loans says that these higher costs are “causing a shift back toward conventional loans.”

The second factor is a rebound in private mortgage insurance. Fannie Mae will buy a loan with as little as 3% down and Freddie Mac will do it at 5%, but loans with less than 20% down do require borrowers to also pay for private mortgage insurance. Matt Johnson, loan officer at Sterling Bank in Seattle says that “more home borrowers are deciding it’s better to pay for insurance instead of putting 20% down.”

A final factor is the rising home prices. As the prices of homes begin to climb again, mortgage lending becomes less risky, and that helps lenders get more comfortable with low down payment loans.

If you are interested in buying a home and don’t have the 20% down payment, please give me a call so we can talk about some of the information written about in this article!


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