Although loans were widely available to people putting less than 20% down during the real estate boom of the late 1990s and early 2000s, lenders have since become much more cautious. Even if you can afford high monthly mortgage payments and have a high credit score, you may have trouble finding loans requiring as little as 5% to 15% down -- and the loan you find will likely require you to pay a much higher interest rate and more points than if you'd made a larger down payment.
The exception are FHA-insured loans, which make provision for buyers with lower than optimal credit scores and unable to make down payments. More and more homebuyers are using these -- but you need to meet separate qualification criteria. See an experienced mortgage broker for help.
Also, if you put down less than 20% or use an FHA-backed loan, you will likely have to pay for private mortgage insurance (PMI).
Private mortgage insurance or "PMI" policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%.
Premiums are usually paid monthly and typically cost around one half of 1% of the mortgage loan. You can normally cancel the PMI once your equity in the house reaches 20%, so long as you've made timely mortgage payments. For more information, see Nolo's article Getting Rid of PMI (Private Mortgage Insurance)
Several federal, state, and local government financing programs are available to homebuyers. The two main federal programs are:
FHA loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), offers insurance backing to loans made to U.S. citizens, permanent residents, and noncitizens with work permits who meet financial qualification rules. Under its most popular program, if the buyer defaults and the lender forecloses, the FHA pays 100% of the amount insured. This loan insurance lets qualified people buy affordable houses. The major attraction of an FHA-insured loan is that people with passable credit scores can put down as little as 3.5%. Another plus is that, unlike with conventional loans, FHA-backed loans allow the entire down payment and costs costs to come from a gift (perhaps from family). The downside is that FHA loans have a maximum loan limit that varies depending on the average cost of housing in a given region. (Find out FHA's loan limits at www.fha.com by clicking on “2014 FHA Limits.”) Also, you’ll have to pay MIP (mortgage insurance premium) as part of an FHA loan. For more information on FHA loan programs, contact a regional office of HUD or check the FHA website at www.hud.gov.
VA loans. U.S. Department of Veterans Affairs (VA) loans are available to men and women who are now in the military and to veterans with honorable discharges who meet specific eligibility rules relating to length of service, credit history, and recent employment, as well as eligible surviving spouses. The VA doesn't make mortgage loans, but guarantees part of the house loan you get from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the amount guaranteed and you, in turn, will owe the VA. This guarantee makes it easier for veterans to get favorable loan terms with low or no down payment and no PMI (private mortgage insurance). (Conventional mortgages have PMI and FHA loans have MIP.) For more information, check www.va.gov or contact a regional VA office for advice.
Other government loan programs. For information on other government loans, contact your state and local housing offices. They often have programs available for first-time homebuyers who are purchasing modestly priced properties. To find your state housing office, check the State and Local Government on the Net Directory at http://statelocalgov.net. Or go to your state's home page, where you may find the listing for your state's housing office.
Whether to pay an upfront fee known as "points" in order to lower your mortgage interest rate can be a tough decision -- there you are, making one of the largest purchases of your life, and you have to come up with a few more thousand dollars by the closing. However, over time the savings in interest payments can be well worth that initial financial stretch.
One point is 1% of the loan principal; for example, if you were borrowing $250,000 at two points, you'd pay $5,000 up front. There is normally a direct relationship between the number of points lenders charge and the interest rates they quote for the same type of mortgage, such as a fixed rate. The more points you pay, the lower your rate of interest, and vice versa.
Before deciding whether it's worth paying points, factor in how long you plan to own your house. The longer you live there (or pay down the mortgage), the better off you'll be paying more points up front in return for a lower interest rate. You'll reach a break-even point, when you've worked off what you spent on the upfront payment via your monthly savings. On the other hand, if you think you'll sell or refinance your house within two or three years, it's a better idea to get a loan with as few points as possible, since you're unlikely to reach that break-even point.
A good loan officer or loan broker can walk you through all your options and trade-offs such as higher fees or points for a lower interest rate. Or you can check a site such as www.homes.com to quickly compare combinations of interest rates and points.
The neurotically organized people have the last laugh on this one. Simply to get preapproved for a loan, the lender will ask for all kinds of paperwork, such as your pay stubs for the last 30 days, two years' tax returns (plus W-2s or business tax returns if you're self employed), proof of other income and assets, three months' bank records for every account you have, proof of where your down payment will be coming from (such as a bank statement and/or a gift letter with the gift giver's bank statement), the names, addresses, and phone numbers of your employers and landlords for the last two years, and information about your current debts, including account numbers, monthly payment amounts, and so forth.
Then, before the loan closes, the lender may ask for follow-up data. Likely examples include proof of where a particular deposit came from or a letter from your employer explaining discrepancies between your year-to-date income shown on your paycheck and the amount you actually earned over the most recent pay periods (a common issue as workplaces have raised and lowered people's salaries with fluctuations in the economy).
Many homebuyers get help from friends and family in making their down payment. That's fine, but the lender wants to make sure the gifts aren't disguised loans -- in which case your debt burden is greater than you're pretending it is, and you may have trouble repaying the bank or institutional lender.
For this reason, lenders routinely require "gift letters" of anyone contributing money to your house purchase.
The letter itself can be fairly simple -- in fact, the lender may give you a form to fill out. It should say something like:
To Whom It May Concern:
We [donor's names] hereby certify that we have made [or will make, on a stated date] a gift of $[amount] to [names of recipients], our [child, sibling, grandchild, or other relationship between recipients and donors], to be applied toward the purchase of the property located at [address].
No repayment of this gift is expected or implied either in the form of cash or future services.
[Sign and date]
You'll need to give the original signed version to the lender.
Of course, a signed letter is no guarantee that you haven't made a separate verbal agreement with your donor that you'll repay the money. But doing so would constitute mortgage fraud -- a crime punishable by fines and jail time.
To learn more about mortgages and intrafamily loans and gifts, get Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder and Marcia Stewart (Nolo).
With all the choices out there, shopping for a mortgage can seem like an overwhelming task. There's good news, however: Despite the many choices of where to get loans (banks, credit unions, savings and loans, insurance companies, and mortgage bankers) their offerings are pretty well standardized, in order to comply with government rules. (The Federal National Mortgage Association or "Fannie Mae," as well as other quasi-governmental corporations, set these rules as a condition for buying loans off the lenders.) What's more, some of the creative mortgage variations that were available before the real estate bubble burst have gone the way of the dodo bird.
Start by deciding what type of mortgage you're interested in. The main choices are between a fixed rate and adjustable rate mortgage, though some hybrids of the two are still available. Once you've narrowed your sights -- for example, to a 30-year fixed term mortgage for $300,000 -- you'll be ready to compare apples to apples.
At that point, you can either start looking at mortgage rates yourself or go straight to a loan broker. Mortgage rates and fees are usually published in the real estate sections of metropolitan newspapers and on mortgage websites. (See Nolo's article Where to Shop for a Mortgage.) Realize, however, that the published rates assume that you've got stellar credit and a good income -- anything less and you'll pay more to borrow money.
It's wise to do some advance research even if you decide to work with a loan broker, so that you'll have a sense of the market. Some loan brokers charge the consumer directly, others collect a fee from the lender (though this ultimately adds a little to what you pay for your mortgage).
Be sure to check out government-subsidized mortgages, which offer both no down payment and low down payment plans. (See the question What kinds of government loans are available to homebuyers?, below.) Also, ask banks and other private lenders about any first-time buyer programs that offer low down payment plans and flexible qualifying guidelines to low- and moderate-income buyers with good credit.
Finally, don't forget private sources of mortgage money -- parents, other relatives, friends, or even the seller of the house you want to buy. Borrowing money privately is usually the most cost-efficient mortgage of all. And its popularity has increased as the credit market has tightened.
For information on how much money you can expect from a mortgage, see Nolo's article Qualifying for a Mortgage.