about six in every 10 who obtained a mortgage made a down payment of far less than 20 percent. Given these num- bers, it is vitally important for any buyer to realize that there are many options for making a smaller down payment than they may be expecting [see sidebar]. AN OFTEN-OVERLOOKED, MONEY-SAVING SOLUTION For many borrowers, conventional loans with private mortgage insurance (MI) have a number of cost-effective benefits compared to FHA loans, which can increase purchasing power for home- buyers. For instance, in contrast to FHA loans that require a down payment of at least 3.5 percent, borrowers can obtain a conventional loan with private MI with as little as three percent down. That half
percent equates to serious money when you’re considering a mortgage of $200,000 or more! What’s more, FHA loans require an upfront mortgage insurance premium (MIP) of 1.75 percent, which creates an additional expense for homebuyers that may be avoided by using private MI. Perhaps best of all, private MI is tempo- rary. It automatically cancels when a bor- rower reaches 78 percent equity in their home or is cancelable upon request when he or she reaches 80 percent equity. This naturally results in the monthly mortgage payment going down. So, in effect, private MI loans become less expensive over time. Conversely, the majority of FHA loans require government mortgage in- surance premiums throughout the life of the loan. This benefit of private MI allows homeowners to save many thousands of dollars over the years.
THE CASE FOR MAKING YOUR MOVE TODAY Homeownership can be one of the great- est contributors to an individual’s financial stability and wealth creation. When interest rates rise (as they are likely to do), low down payment programs like conventional loans with private MI help people get into homes sooner so they can begin to build their future. By remaining on the sidelines in the current market, potential homebuyers may miss out on the opportunity to own their preferred home and will spend more money on rent that could instead go towards build- ing equity in their own property. •
KNOW YOUR OPTIONS: HOW TO LAND A LOW DOWN PAYMENT B orrowers have several options available to them if they want to land a low down payment: • Conventional loans backed by private mortgage insurance (MI) • Combo loans, also known as “piggy back loans” A combo loan involves the borrower taking out two loans: one to cover the down pay- ment on a property and a separate loan to cover the remainder of the purchase. • Government-insured loans through the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA) that allow for lower down payments In most cases, borrowers opt for either con- ventional loans with private MI or FHA-in- sured loans.
Lindsay Johnson is the President and Executive Director of the U.S. Mortgage In- surers, a trade association that represents the private mortgage insurance industry.
LET’S TALK PRIVATE LENDING Members of the American Association of Private Lenders are the trend-setters in private real estate lending. From their voluntary adherence to a Code of Ethics to their knowledge of the private lending process, they are the gold standard for the industry.
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THE PERCENTAGE OF PEOPLE 34 YEARS OF AGE OR YOUNGER WHO THINK THEY NEED 20 PERCENT OF THEIR PURCHASE PRICE IN HAND TO BUY A HOUSE.
ABOUT FOUR OUT OF EVERY FIVE FIRST-TIME HOMEBUYERS MADE A DOWN PAYMENT OF LESS THAN 20 PERCENT LAST YEAR.
PERCENTAGE OF PEOPLE 34 YEARS OF AGE OR YOUNGER WHO REALIZE THEY MIGHT NEED FIVE PERCENT OF THEIR PURCHASE PRICE OR LESS.
ABOUT TWO IN EVERY FIVE HOMEBUYERS IN THE COUNTRY MIGHT HAVE TO PUT 20 PERCENT DOWN TO MAKE THEIR
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