When it comes to buying a home, whether it is your first time or your fifth, it is always important to know all the facts. With the large number of mortgage programs available that allow buyers to purchase a home with a down payment below 20%, you can never have too much information about Private Mortgage Insurance (PMI).
“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.
Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:
“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.”
According to the National Association of Realtors, the average down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 6%, while repeat buyers put down 14% (no doubt aided by the sale of their home). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.
Here’s an example of the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:
The larger the down payment you can make, the lower your monthly housing cost will be, but Freddie Mac urges you to remember:
“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”
If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and to help you make the best decision for you and your family.
In the long home-buying journey, lenders are often pegged as the bad guy—the villain who holds the purse strings and decides whether (or not) to loosen ’em up and grant you a mortgage.
OK. Let’s take a step back. This bad rep is mostly a bad rap. Because the reality is that lenders make homeownership possible for the majority of Americans who do not have the ready cash to buy a home. And even if you’re a less-than-ideal home buyer, because of bad credit or lack of a down payment, they can actually help your loan go through.
Here are five ways lenders can assist you on the path to homeownership, and some recommendations as to how you can make the most of this relationship.
1. Lenders can get you pre-approved
If you know you’re ready to buy—before you’ve even seen the inside of a single house—it’s wise to head to a lender to get pre-approved for a mortgage, pronto. This means lenders check your financial history and determine how much money they’re willing to loan you to buy a home. “You want to apply before you’re entirely under the gun,” says Steven Bogan, regional managing director for Glendenning Mortgage Corporationin Haddonfield, NJ. “If you wait until you’ve made an offer on a house, you could run into problems.”
Pre-approval is proof to home sellers—and yourself!—that you won’t have problems getting the loan you need, once that special house comes your way. It is best to seek a pre-approval at least a month or two in advance, Bogan says. Requirements for approval in a post-housing bubble world can create headaches even for stellar borrowers.
But don’t start too early. Pre-approvals are only good for 30 to 60 days, so make sure you’re really ready to hit the pavement and start looking for houses. Still, don’t stress if your pre-approval expires; getting it re-upped isn’t a big deal.
“We usually just need to run your credit again, maybe get an updated pay stub or bank statement, and you’re good to go,” says Bogan.
2. If you can’t get pre-approved, lenders can show you how
So what if you apply for pre-approval and get denied? It hurts, but don’t worry—the pre-approval process isn’t a one-shot deal. Most lenders will be happy to work with you, even if you aren’t pre-approved right off the bat.
“The majority of lenders will give buyers a step-by-step path they need to follow to get up to approval,” says Bogan. And that usually involves boosting your credit score (more on that next).
3. Lenders can help you boost your credit score
One of the most common reasons home buyers don’t get approval is a lousy credit score—the all-important numerical summary of how reliable they’ve been paying off debts, from credit cards to college loans. You want a simple equation? The lower your score, the less likely you are to get a loan. The good news is that you can take action to boost your credit score. A credit repair company will show you the ropes, but will charge for those services.
You’ve actually got a free credit-boosting guide at your disposal: the lenders who just passed you up for a loan. In most cases, they’ll be happy to show you what you need to do to boost your credit score. And while it usually takes a few months for the credit bureaus to record these changes, lenders have another ace up their sleeve: They can do a “rapid re-score” that corrects and updates info on your credit report in a matter of days.
4. Lenders can help atypical borrowers
Many home buyers are employed, earning a regular W-2 income—a generally safe bet for lenders. But If you’re self-employed, a contractor or running your own business, and your income is more prone to valleys and peaks, a good relationship with a lender can help you cut past reservations about your loanworthiness. “Basically, we’re just going to look at the last two years of tax returns, instead of W-2’s and pay stubs,” says Bogan.
However, Bogan does recommend applying even earlier if you’re a non-W-2 wage earner, since there is more paperwork and more of an investigative process into your earnings. And unlike everyone else, you’ll need to consider your timing. “Say, for example, 2016 tax returns are almost due, and it was a great year incomewise. It would probably be in your advantage to wait until after you’ve filed your taxes to apply for a mortgage,” Bogan says.
No matter what your situation, though, to get the best help, you’re actually going to have to call. “You absolutely want to talk with somebody in person,” says Bogan. So skip the online forms, and ask your friends and family (or your Realtor®, if you have one already) to recommend someone you can sit down with to get the process rolling.
There are many potential homebuyers, and even sellers, who believe that you need at least a 20% down payment in order to buy a home, or move on to their next home. Time after time, we have dispelled this myth by showing that there are many loan programs that allow you to put down as little as 3% (or 0% with a VA loan).
If you have saved up your down payment and are ready to start your home search, one other piece of the puzzle is to make sure that you have saved enough for your closing costs.
“Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage. These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction. Closing costs are typically between 2 and 5% of your purchase price.”
We’ve recently heard from many first-time homebuyers that they wished that someone had let them know that closing costs could be so high. If you think about it, with a low down payment program, your closing costs could equal the amount that you saved for your down payment.
Here is a list of just some of the fees/costs that may be included in your closing costs, depending on where the home you wish to purchase is located:
Government recording costs
Credit report fees
Lender origination fees
Title services (insurance, search fees)
Tax service fees
Is there any way to avoid paying closing costs?
Work with your lender and real estate agent to see if there are any ways to decrease or defer your closing costs. There are no-closing mortgages available, but they end up costing you more in the end with a higher interest rate, or by wrapping the closing costs into the total cost of the mortgage (meaning you’ll end up paying interest on your closing costs).
Home buyers can also negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees in order to get the deal finalized.
Speak with your lender and agent early and often to determine how much you’ll be responsible for at closing. Finding out you’ll need to come up with thousands of dollars right before closing is not a surprise anyone is ever looking forward to.