WASHINGTON — Mortgage down payments as low as 3 percent — and even 100 percent loans — are returning. That may be good news for buyers who haven’t accumulated a lot of savings.
But there are trade-offs: Mortgage payments will be higher because more money is being borrowed and because private mortgage insurance is required for down payments less than 20 percent.
With that in mind, buyers may want to consider renting for a longer time and saving more for a larger down payment to make sure they can truly afford a home.
If after careful consideration, buyers settle on a low down payment, it’s best to go in with eyes wide open. It’s important to know the details of the loan program and their possible ramifications on finances. The interest rate on a loan with 5 percent down will typically be slightly higher (one-eighth to one-quarter of a percent) than one with 10 or 20 percent down because the loan-to-value ratio is higher.
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Before the housing bubble burst, many lenders offered borrowers 100 percent financing. Some lenders even allowed buyers to finance 105 percent of the home value.
Those zero down and low-down-payment loans were part of the problem that led to the housing crisis, because homeowners who never made a down payment found themselves quickly underwater when home prices dropped and were more likely to face foreclosure because they couldn’t refinance without any home equity.
Conventional lenders quickly dropped risky loan products and the pendulum swung the other way to loans requiring a minimum down payment of 20 percent or, for borrowers with excellent credit, 10 percent.
First-time buyers and repeat buyers who could not make a large down payment have been limited in recent years to loans insured by the Federal Housing Administration (FHA), which require both upfront and annual mortgage-insurance premiums that increase monthly payments. Members of the military and veterans have had access to zero-down-payment mortgages through the Department of Veterans Affairs loan program.
But now conventional lenders are bringing back mortgage loans with lower down payments. Data from the Federal Housing Finance Agency show that more people are putting less down when they purchase a home. In its recent report on conventional mortgages, the agency found that the share of loans for 90 percent or more of the price had grown to 23 percent in June from 15 percent a year before, while the share of loans for 70 percent or less of the price had declined to 23 percent from 26 percent.
“Most conventional loans require a down payment of 5 percent, but some programs allow a down payment as low as 3 percent,” says Doug Benner, a loan officer with Embrace Home Loans in Rockville, Md. “A few banks and credit unions have special 100 percent financing products, too, that they keep as portfolio loans.”
Portfolio loans are mortgages that financial institutions keep on their books rather than sell on the secondary market. Lenders can establish their own criteria and be more flexible than they are with loans being sold to Fannie Mae or Freddie Mac.
Traditional conventional loans that are sold to Fannie Mae or Freddie Mac require private mortgage insurance (PMI) for mortgages with a down payment of less than 20 percent, but borrowers have several options for paying PMI.
They can pay it monthly until their loan-to-value ratio reaches 78 percent, or they can take advantage of other programs offered by many lenders, such as paying a one-time fee or having their lender pay PMI while they pay a slightly higher interest rate.
The resurgence of low-down-payment financing may seem dangerous, but Benner says the loans are different this time.
“When we saw these loans before the housing bubble burst, underwriting had gone out the window,” he said. “Now everyone has to undergo detailed underwriting and provide complete documentation about their employment history, their income, their assets and their ability to repay the loan. It used to take just a rubber stamp to get a mortgage approved, but now every aspect of every loan is scrutinized.”
At Navy Federal Credit Union, the 100 percent financing “Homeowner’s Choice” loan program took a hiatus in 2008 during the height of the recession, said Katie Miller, the credit union’s vice president of mortgage products in Vienna, Va.
“The performance of these loans has been better than the performance of prime loan portfolios of other lenders,” she said. “We service all of these loans in-house so we can get ahead of any issues and work with our members to resolve them.”
The Homeowner’s Choice loan program is a 30-year fixed-rate loan reserved for owner-occupied homes. The program is geared to first-time buyers and to members of the military who have their VA loan eligibility tied up in another property, Miller said.
Tara Kirrane, a wealth-management banker with Merrill Lynch in Washington, D.C., said prospective buyers must understand their long- and short-term goals before deciding how much cash to put down on a home.
“You need to think about how long you’ll stay in the home, what your job situation is, what you expect your income to be like in the coming years and your current cash flow,” she said.
“Before you can decide, you need to estimate what funds you have available for a down payment and then look at the monthly payments for different down payment options to make sure our pick the right loan option.”