PickMyMortgage.com

Loan Product Summary

SUMMARY Helping First-time Home Owners lending institutions and government sponsored agencies have structured several mortgage programs to help first-time home buyers. For Those with Less than 20% Down generally these loan programs require less than 20% down payment — and in some case zero % down — and the interest rate is typically lower than normal rates on conventional loans. Lower Income Requirements the income requirements for these programs are less stringent — both the income and debt ratios allow for higher percentages when qualifying for a loan:

 

money saving tip Interest rates on government sponsored loans are 0.5-1.0% lower than other conventional loan rates FHA / VA closing costs do not require two months of PITI payments (principal, interest, taxes, insurance) Depending on the amount of your down payment, piggyback loans may reduce your overall payment and avoid PMI Using your IRA investments on your first home purchase allows you to avoid pre-payment penalties on IRA withdraws Another Money Saving Tip View our program to help payoff your mortgage in 1/3rd of the time saving your thousands in interest — plus imagine how fast you can build up your equity with this payoff plan. see how the mortgage payoff plan works

Loan Advantages and Disadvantages

ADVANTAGES Helps First-Time Home Owners first-time homeowners select these products when they want to get into their homes early without waiting to raise the 20% down payment Benefits All Type Owners these programs benefit all types of homeowners — those with investments, good credit, moderate income, etc.   DISADVANTAGES Amount Limitations many of these loan programs limit the amount that you can borrow Will Require PMI Insurance many of these programs require PMI insurance, which can add to the total monthly cost

 

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About Minimum Payment Plans

Fannie 97®

• Fixed-rate mortgage loan with terms between 15 and 30 years
  
  targeted for home buyers who have limited funds for their down payment and closing costs
  
  requires a down payment of only 3 percent
  
  provides expanded debt-to-income ratios — you may use up to 33 percent of your gross monthly income for housing expenses each month (instead of the standard 28 percent) and 38 percent for your total monthly debt expenses (instead of standard 36 percent)
  
  see our notes on debt-to-income ratios
  
  

• To qualify for this loan, the homebuyer must earn no more than the area median income
  
  there are cost-of-living adjustments for expensive areas of the country.
  
  check with your lender for more information about this program and other programs for qualified borrowers
  
  there are other Fannie Mae programs for no/low down payment loans: click here

Freddie Mac Alt 97®:

• Helps home buyers with good credit but who have limited savings to get into a home
  
  targeted to borrowers who have worked hard to establish and maintain a strong credit history.
  
  
• There is typically no income requirements
  
  qualifying ratios are higher than traditional mortgage products
  
  check with your lender for more information about this program and other programs for qualified borrowers
  
  For more information about low/no-down payment options:
  www.freddiemac.com

100%+ Programs

The 100%+ home buyer programs

allow applicants to buy their first home without bringing any money to the table.

Two popular programs include the Home Owner 103% and 107% programs. These programs will vary by lender.

The 103% program allows you to finance 103% of the appraised contract price of the home. The 107% program allows you to finance 107% of the appraised contract price.

The extra amount can be used as the down payment and to pay closing costs so that you can get into your home without having to raise the necessary cash.

Let's use this table to illustrate:

30-Year Term 100%  103% Appraised Contract Price: $100,000 $100,000 Down Payment at 20%: $20,000 no down Mortgage Amount : $80,000 $103,000 Interest Rate (APR): 6.00% 6.50%  Monthly Payment: $479.64 $651.03  PMI Insurance: $0 $100 (approx) Amounts Needed to Close Down Payment: $20,000 included Closing and Settlement: $3,000 included

 

In the example, the 103% mortgage loan will cover your down payment and give you an extra $3,000 to pay points, closing costs and escrow deposits for taxes and insurance, enabling you to bring no money to settlement.

But note that you will pay a slightly higher interest rate and Private Mortgage Insurance (PMI) each month. (Private mortgage insurance is a monthly premium paid by the borrower if the loan amount exceeds 80 percent of the purchase price: more information).

As the illustration shows, you will pay approximately $135 extra (for the higher interest rate and PMI insurance) each month for the 103% program.

Rates and programs will vary by lender

Other options to consider:

• Need extra cash for your down payment and closing
  
  speak with you lender about piggy-back loans. Piggy-back loans are second mortgages that "piggy-back" on the first mortgage. The loan amounts are written to meet the down payment requirement to avoid PMI insurance.
  
  Some lenders may write piggy-back loans that include a little extra for closing costs. Piggy-back loans are generally available to applicants with better-than-average credit and debt ratios.
  
  
  
• Need extra cash for home improvement:
  
  consider closing a home equity loan when you close on your mortgage. The home equity loan can be written against your down payment and treated as a second mortgage. You can use the proceeds to make home improvements and pay off debt (especially debt used to pay closing costs).

Using Investments as a Down Payment

New IRS rules and lending products have been developed that assist first-time home buyers into their first home.

These products include:

— using your own IRA investment
— using your other personal investments
— using family or other investments
— using gift money

Using Your IRA Investments:

• IRS rules allow for an one-time distribution from qualified IRA accounts
  
  without the 10% penalty for acquisition of a home for first-time home buyers.
  
  See IRS publication 590 for information:
  www.irs.gov/formspubs
  
  We quote from the IRS web site:
  
  401(K) Plans:

Question:
Can I withdraw funds penalty free from my 401(k) plan to purchase my first home?

Answer:
If you are less than 59 1/2 years of age, you cannot withdraw funds from your 401(k) plan to purchase your first home without being subject to a 10 percent additional tax on early distributions from qualified retirement plans.

However, depending on the rules for your 401(k), you may be able to borrow money from your 401(k) to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) as well as other plan rules.

References:
Topic 424, 401(k) plans

IRAs:

Question:
If I can't withdraw funds penalty free from my 401(k) plan to purchase my first home, can I roll it over into an IRA and then withdraw that money to use as my down payment?

Answer:
Yes, if you are receiving a distribution from a 401(k) that is eligible to roll over into a IRA and you meet all of the qualifications for an IRA distribution for a first-time homebuyer. Your plan administrator is required to notify you before making a distribution from your 401(k) plan whether that distribution is eligible to be rolled over into an IRA.

To see if you qualify for a distribution to be used as a first-time homebuyer, refer to Publication 590, Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs).

Using Your Personal Investments:

• This type of of Pledged-Asset Mortgage product may not be suitable for first-time buyers.
  
  But we list it anyway for reference.
  
  Referred to as asset-backed mortgages. Targeted to buyers with sufficient income who want to pledge their investments as collateral instead of a making a cash down payment.
  
  Pledged assets may include investments, CDs, mutual funds, stock portfolios, and investment property.
  
  
  
• Generally, pledged assets are maintained in a collateral account maintained by the lender.
  
  Pledged assets can be used for other family members, such as Zero-Down mortgage programs explained below.
  
  Pledged assets will remain as investment instruments, respectively gaining market value for the homeowner. However in most cases, the homeowner will not be able to sale or change the investment strategy without approval by the lender.
  
  
  
• Homeowners should calculate the investment difference
  
  between the higher interest rate charges for pledge-asset mortgages and the investment potential gain of the pledge asset.
  
  There are disadvantages. If the homeowner defaults on the mortgage, the lender gets both the pledged assets and the home.

Using Family or Other Investment:

• Many families want to help young people get started on home ownership with a gift that usually goes towards the down payment.
  
  The Zero Down Payment Mortgage allows the donor to deposit the cash gift into an interest-bearing account as collateral for the zero-down payment.
  
  The gift money keeps earning interest — and it allows the first-time home buyer to purchase their first home with zero-down
  
  The zero-down mortgage may vary from fixed-rate and ARMs. Zero-Down Payment Mortgages are restricted in certain states. You need to ask your lender about the program.
  
  Advantages / Disadvantages:
  
  
  • Zero-downs can help new home buyers get into their home with help from family or other parties
    
    
  • Donors who donate the funds can earn interest on the money while the money remains in the home as the down payment
    
    
  • Major drawback is home owner default, the donor will lose their investment.
    
    
  • Likewise, investment remains tied in the home at relatively low rates of return when compared to other investments.

Gift Money:

• Relatives can help with your down payment by "gifting" to you some of the money.
  
  However, you will be required to report this gift when applying for a mortgage loan.
  
  If you are obligated to repay the "gift" given to you by a relative, this obligation may impact your debt-to-income ratios (see mortgage qualifications).

Working with PMI

The standard down payment percentage is 20% of the home's purchase price.

Many lenders now allow for lesser percentages — as little as 3-5%, provided that Private Mortgage Insurance (PMI) is obtained.

PMI is mortgage default insurance that is required for all conventional mortgage loans with less than a 20% down payment.

It is designed to pay the lender a portion of the outstanding balance of a loan in the event of homeowner default.

PMI helps many first-time and upscale home buyers to purchase a home with less than 20% down.

There is a cost for PMI, which is added to your total monthly cost for your mortgage (see understanding escrow payments)

Costs can vary depending on the mortgage loan amount, size of the down payment, and type of mortgage loan.

The average cost for a median price home ranges from $40- $70 per month.

For more information about PMI: www.privatemi.com

What are Piggy-Back Loans

Many lenders now offer the piggyback loan for home buyers who want to avoid PMI payments.

Piggyback loans is where the lender stacks a second mortgage loan on top of the first mortgage loan. The second mortgage is made at the borrowed amount that brings the down payment percentage to 20%.

The most common piggyback loan is the 80/10/10

80% First Mortgage / 10% buyer down / 10% Second Mortgage

Example:
the purchase price of the home is $100,000.

The buyer only has $10,000 for the down payment. The lender will then underwrite a second loan for $10,000 to bring the required down payment percentage to 20%.

In other words, they have stacked (or piggybacked) one loan onto another.

The interest rate on the second mortgage loan is generally higher than the first mortgage.

But unlike PMI, which cost is not tax-deductible, the interest charges on your second mortgage qualifies to be deducted from your taxes.

You need to run the numbers to compare the cost advantage of piggybacks versus PMI. Don't forget to consider the tax advantage of both products.

Note: The loan information above is general information related to mortgage products and the mortgage lending process. The information does not represent terms of any particular lender. Lenders whom you may work with may offer different product terms.

PickMyMortgage.com is not a lender. Therefore, we cannot quote rates or guarantee best terms. We refer applicants interested in getting a lending quote to Secure Rights, a licensed mortgage broker representing multiple lenders.