Getting a low down payment home loan these days is tougher today than it was just a few years ago. The days of the zero down home loan are behind us now due to the credit crisis. Banks and other home mortgage lenders are returning to the old days where they expect borrowers to have substantial down payments, generally 10% or better of the total purchase price of the home.
However, there is still a way to get a low down payment home loan and that is a Federal Housing Administration (FHA) loan. With a FHA loan you will only need 3% of the total purchase price of the home until January 1, 2010 when this percentage goes up to 3.5%. In most of today’s real estate markets this percentage is doable to potential homeowners who’re able to practice a little financial discipline and save their money with the goal of home ownership in mind.
It is important to note that there are some aspects of FHA loans that a borrower should be aware of before they choose to go the low downpayment route.
First of all, FHA loans will tend to have higher rates than conventional loans. In most markets this difference will run between .5% and .75%. Occasionally you can find incentives from home builders that will pay down this rate difference so be on the lookout for these deals. A good points incentive plan may be able to null out this higher interest rate.
FHA loans require mortgage insurance and the initial insurance premium, that is usually rolled into the loan, is about 1.75% of the total amount of the home loan. On top of that there’s an annual 0.55% premium. This could easily add another $100-200 to your monthly payment so make sure that you take this into consideration when you are planning your budget.
The interest rate FHA loans are also sensitive to the credit score of the borrower, just like conventional loans. Borrowers with a credit score of less than 720 will typically pay a higher interest rate, generally of .5% to 1% higher. Given that conventional home loan lenders generally will increase the rate 2% for borrowers with poor credit scores this helps make FHA loans attractive.
Lastly, you have to consider that when you purchase a house or condo with a low down payment home loan you will start out being ‘upside down’ on your loan. This means that you will owe more than the house is worth. Remember that the costs associated with the sale of a home make up about 5% to 6% of the total purchase price, the amount of the loan. This includes fees for the real estate agent, attorneys, title and taxes. Traditionally, this difference has been absorbed by rising home prices but, given the economic climate of 2009-2010, you probably shouldn’t expect a new home to rise in value for several years.
The important thing to remember about a FHA low down payment home loan is that should you have to sell early your options could be limited to a short sale or foreclosure. With the current economy, you have to make sure that you have enough cash on hand to weather a financial storm like an unexpected job loss. I recommend that a new homeowner have between 3-6 months of mortgage payments in an emergency fund. Don’t purchase a home by using all of your financial reserves, especially if you plan on using a low downpayment home loan plan. You don’t want to put yourself in the position of your new home owning you.