Zero and Low Down Payments for Home Buyers
by Jim from Marlton, NJ
Ask Kate about zero and low down payment programs for home buyers: Soon after Fannie Mae announced their intention to reinstate the 3% down payment program, Jim wrote me about qualifying for a mortgage with minimal down. He has one home financed with the FHA mortgage and wants to buy an additional home in 2016 - without selling the first home.
February 2015 Update: New 3% Down Payment Program!
Freddie Mac has approved their 3% down payment program, Home Possible Advantage
, making it available March 23, 2015. Fannie Mae's My Community Mortgage
3% down payment program has been available since mid-December 2014. (See more.
Low Down Payment Options for Borrowers with Multiple Mortgages and a Rental Property By Jim from Marlton, NJ
I currently have a FHA mortgage on a home in Marlton, NJ, which I purchased about two years ago. The LTV is still around 93-94% and I have a low rate.
I am getting married in the Spring of 2016 and my fiance and I are thinking about buying another home sometime that year. I would not sell my home and would rent it out.
My concern is that I have a FHA that is not at 80% so would this hurt me in qualifying for another mortgage?
Also, I would like the next home to not be 20% down up front. So if I paid the current house down to 80%, then can I qualify for another FHA?
I know there are other programs that I am not familiar with so I just wanted to know my options so that I could start to plan ahead. The new home would be in Voorhees, NJ or Marlton, NJ.
Ask Kate answers: Low Down Payment Programs for Borrowers with Multiple Mortgages and a Rental Property
Although in general, a borrower can only have one FHA mortgage, there are
specific exceptions to the guideline to accommodate circumstances that a borrower could not have planned for when they originated the government-insured financing.
For example, if a homeowner's employer suddenly transfers them across the nation, the borrower may be able to buy the next home using a low down payment FHA mortgage without paying off the first home's FHA financing. However, the lender may require that the borrower pays down the loan balance on the first home to a lower loan-to-value (LTV).
It goes without saying that many homeowners can't come up with that kind of cash. With regrets, they sell the first home in order to pay off the mortgage. Then they are eligible again for a minimal down payment on new FHA financing.
A couple of other circumstances which would allow a second FHA mortgage would be an increase to the number of family members, or due to a divorce, the spouse who was not awarded the home will need low down financing to provide a place to live.
Qualifying with Multiple Mortgages and a Rental Property
But let's say you apply for a conventional mortgage on the next house, whether or not you are transferred to another city (as in the previous example). A 20% down payment will not be required strictly because you have minimal equity and FHA financing on the first home. This is especially true after owning the first home for several years.
Be aware though that lenders may require you to have a few thousand dollars in your savings account due to being an unproven landlord. This requirement often drops off over the years as your credit report demonstrates that you are financially capable of handling multiple mortgages.
Additionally, as a new landlord without tax returns to verify the income and expense of a rental, lenders may add both mortgages into your debt calculations when you finance the next home.
Other lenders may only add the difference between the rental property's mortgage payment and 75% of the rental income. Here's an example of the calculation: $1200 house payment on rental property minus ($1000 rent minus 25% expense and vacancy factor) equals $450.
As you can see, adding $450 into your debt ratio in lieu of the entire $1200 house payment for the rented-out home makes qualifying with multiple mortgages and a rental property much easier!
Low Down Payment Mortgage Programs
Getting back to your main question, let's take a look at home loan programs that require less than a 20% down payment.Fannie Mae with 3% Down Payment:
Fannie Mae is now supporting a 3% down payment program, My Community Mortgage
, similar to the one they discontinued in 2013. This means a first time home buyer can once again borrow 97% of the appraised value or purchase price, whichever is less, on a conventional mortgage, effective December 2014. This program is a direct competitor to the FHA mortgage program with low down payment requirements, although it has stricter credit-qualifying guidelines. Freddie Mac with 3% Down Payment:
Freddie Mac has approved their 3% down payment mortgage program, Home Possible Advantage
, effective March 23, 2015. All qualified home buyers can take advantage of the low down payment program because, unlike Fannie's plan, Freddie's is not restricted to first time home buyers.Fannie Mae and Freddie Mac with 5% Down Payment:
Also a conventional program, a 5% down payment requires more upfront cash but saves on the ongoing monthly mortgage insurance. For example, 5% of a $100,000 home is $5,000 while 3% of a $100,000 home is only $3,000. But the monthly mortgage insurance could be around $65 for 5% down while the 3% program could charge as much as $90 and possibly even more! That's a big difference for a $100,000 home!Fannie Mae HomePath Financing for Home Buyers:
After Fannie Mae forecloses on a property, they have the option of offering it for sale as a HomePath property. Under the HomePath financing program, retired effective October 7, 2014, many of these houses were eligible for special mortgage terms, for example, low down payments, no appraisal, and no mortgage insurance. I mention this in case the HomePath financing program resurfaces considering that Fannie is reinstating the 3% down payment program.USDA Rural Home Loans with Zero Down Payment:
Not just for first time home buyers, borrowers purchasing in designated areas are eligible for this program with zero down payment, competitive fixed rate for 30 years, and no mortgage insurance. Don't write off this program, assuming the USDA Rural Development Home Loan is only for farm communities! Find out what makes the program tick
!VA Mortgage Loans with Zero Down Payment:
This zero down payment program that boasts no mortgage insurance and competitive interest rates is designed for U.S. military, veterans, and their surviving spouses.
Recent FHA Home Loan Questions and Answers
When Debbie bought a home, it was not disclosed that the neighbors' chain-smoking habits would prevent her from opening her windows. She asks if FHA financing would allow her to rent out her house less than one year after obtaining her mortgage. See my answer to Debbie at FHA Loan Requirements: Can I Rent Out My Home
Maria's mortgage refinance has been caught in a vicious cycle. The lender botched paying off her FHA financing by the end of the month, necessary to avoid a prepayment penalty of 30 days interest. See my answer to Maria at FHA Prepayment Penalty News and 3 Day Right of Rescission
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