How to Take Advantage of the Current Housing Market (Even if you
Have Little or No Money to Put Down!)

By Dale W Doughty


Ever wish you could stop writing those rent checks so you could start building equity in
your own home rather then your Landlord’s?  Are you finding it difficult to believe you
would ever be able to save up enough money to reach the typical 20% down needed
for conventional mortgages?  Good News!  There are various programs out there to
help you own a piece of America and you don’t necessarily need great credit and a
big income.

Before we get in to the types of programs available, one common area of confusion
when people are buying a home is when it comes to down payment and the amount
due at closing.  When you purchase your first home the lender will generally require
you to prepay your “Escrows”.  Typical expenses that get put in to an escrow account
on your behalf include:  municipal property taxes, homeowner’s insurance, mortgage
insurance, etc.  These values are all spelled out on your “Good Faith Estimate” and
are part of your “Closing Costs.”  So, if as an example, you wanted to buy a home for
$100,000 and planned on putting 10% down you would actually need to bring more
than $10,000 to closing.  If your closing costs totaled $5000 in this example your total
amount needed at closing would we $10,000 (your 10% down payment) plus $5,000
(your closing costs) for a total of $15,000.  One way to get around this and lessen the
amount of money you need to bring to the table is through “Seller Concessions.”  If, in
this example, the seller had this house that you wanted to buy listed for $100,000 and
your Broker could get them to agree to sell you the house if you paid the full asking
price but if they paid your closing costs (or a 5% seller concession) then you would
only need to bring your $10,000 down payment to closing and the seller would pay the
$5,000 in closing costs.  I have outlined some of the basic programs that you may be
able to use to purchase your new home below.  Please keep in mind that many of
these programs will vary slightly by lender and the best way to find out which program
is right for you (and which lender) is by contacting a reputable government approved
Mortgage Professional.

Now that you have a basic understanding of how down payments and closing costs
work with regards to a purchase here are some common programs that we use every
day to help buyers obtain the house of their dreams.

One common program is Rural Housing which is insured by the USDA.  This program
provides 100% financing to qualified borrowers plus the 2% mortgage insurance
premium that is due up-front.  So, if your home was $100,000 your loan amount with
this program could be up to $102,000.  This program also allows the seller to pay up
to 6% in seller concessions.  Therefore, if your closing costs were $6000 or less you
could theoretically buy your new home with no money out-of-pocket.  This program is
available to low and moderate income families only.  Although there is typically no
minimum credit score required for this program a letter of explanation is typically
required if your credit score is below 620.  Regardless of credit score however, most
lenders will not approve your mortgage unless you have had no late payments within
the past 12 months and no seriously derogatory credit within the past 36 months.  You
do not need to be a first-time homebuyer to qualify for Rural Housing but you can not
currently own another home.  Another advantage of Rural Housing is that you can
finance in any needed renovations making this a great choice for foreclosed homes
that may be in disrepair and need some work prior to moving in.

Fannie Mae and Freddie Mac have recently introduced programs for first-time home
buyers exclusively.  These programs are both quite similar.  Freddie Mac’s program is
called the Home Possible 97.  Basically, it requires a 3% down payment and an
income of no more than 100% of the area median income limits for a single family
residence and a 5% down payment if you are looking to purchase a 2-4 unit property.  
Mortgage Insurance premiums are dependent upon your percentage of down payment
with higher down payments causing a lower mortgage insurance premium.

Likely the most popular program is FHA.  FHA mortgages generally require a 3.5%
down payment and like the other programs will require you to pay mortgage insurance
(although slightly less expensive premiums then Rural Housing).  You do not need to
be a first-time home buyer to qualify for an FHA mortgage, but you do need to qualify
from a credit standpoint and have acceptable “Qualifying Ratios.”  Generally, to be
considered for an FHA mortgage you need to have a minimum credit score of 620,
although some lenders will consider down to a 580 with a letter of explanation.  FHA
mortgages require a maximum qualifying ration of 29/41.  This is a calculation that is
used to make sure you can reasonably handle the monthly mortgage payment
amount.  To calculate your qualifying ratio you need to first know your gross monthly
income (before taxes and insurance).  If, for example, you earn $3000 per month your
maximum housing payment (including principal & interest, property taxes, insurance
and any homeowner association dues) is $870 ($3000 x 29%=$870).  Your total
monthly debt payments (housing expenses+car payments+minimum credit card
payments+any other monthly debt obligations) cannot exceed $1230 in this example.  
($3000 x 41%=$1230)  Like Rural Housing, FHA allows up to 6% in seller concessions
and has a special loan program called the 203k program that allows for the costs of
needed renovations and upgrades to be added to the loan amount.

There are many other programs available on the market today that offer financing up
to 100% for people with various types of background.  For instance, our military hero’s
can take advantage of VA loans that allow veterans to purchase a home with no
money down.  There are also various lender specific programs for career Fire
Fighters, Teachers, Police Officers and Medical Professionals.  Some states even
offer certain state-level bond products to help low-income households but some of
these programs may have drawbacks limiting your ability to build equity, seek
secondary financing or sell the home.  Make sure you have a thorough understanding
of any mortgage program and its potential drawbacks before committing yourself to
anything.

Every lender has their own stipulations and guidelines when it comes to underwriting
any one of these programs.  There are also various guidelines with regards to income
and maximum loan amount that vary by state and county.  Usually it’s best to work with
a Mortgage Professional that is located in your region of the country so that he or she
knows what your specific requirements are for the area you choose to buy a home in.
Sanford Branch
909B Main Street
Sanford, ME 04073
(207) 850-1007
(877) 440-2739