Feast of Loan Choices Now Available To First-Time Buyers

Peter G. Miller
OurBroker®

Look at the home sales for any community and the odds are overwhelming that 40 percent or so of those purchasers are first-time buyers, a reality made possible by a growing array of loans with little down and little hassle.

When properties are bought there are two basic forms of cash costs for buyers. Because lenders have traditionally financed only a portion of the purchase price, buyers have had to put up the rest as a cash downpayment, a second loan, or some form of insurance to protect the lender in case of default -- say FHA, VA, or PMI coverage.

The second set of costs are transaction expenses -- taxes, legal fees, adjustments, title insurance, and other charges at closing.

What's happened is that downpayment requirements have generally fallen. At the same time, some closing costs have declined or they can now be financed over the loan term. The result is smaller checks from consumers at closing.

Here are some of the options for first-timers which translate into reduced buying costs.

• VA Financing. If you have appropriate experience, such as two years of active duty service in the military, six years in the National Guard or reserves, or appropriate time in the Public Health Service, you may then qualify for VA financing -- loans with nothing done and no monthly mortgage insurance fees.

• FHA Loans. Open to all owner-occupants, the FHA program allows individuals to buy with 3 percent down. The up-front mortgage insurance premium (MIP) is scheduled to drop after January 1st from 2.25 percent of the loan amount to 1.5 percent -- that's $750 in savings on a $100,000 mortgage.

• Private Mortgage Insurance (PMI). You can buy with 3 to 5 percent down or less with PMI. The attraction here is the ability to buy now and not wait until a larger downpayment is available. PMI backing is used by nearly 1.5 million borrowers annually.

• State-Backed Mortgages. Loans made with guarantees from state governments come in two forms -- bond-backed mortgages that typically offer below-market interest levels and little down, and mortgage-credit certificates or "MCC" loans. MCC financing features little down, low rates, and special tax treatment for interest payments -- some interest is regarded as a tax credit while the rest is treated as a simple tax deduction. Tax credits are the equivalent of tax payments, and a very much better write-off than a tax deduction.

• 97-Percent Financing. Financing with 3 percent down is available nationwide. Such loans are made by local lenders and then bought by national mortgage buyers. Ask about Freddie Mac's "Affordable Gold 97" and "Alt 97" or the "Flexible 97" programs from Fannie Mae, as examples.

• While downpayments are an issue, in some cases so too is credit. Those with impaired credit might want to look at such programs as Neighborhood Advantage from the Bank of America and the "Creditworks" plan from the National Foundation for Credit Counseling.

• 100 Percent Financing. Freddie Mac has announced that it will buy no-money-down loans from local lenders under its Mortgage 100 program, Fannie Mae is expected to offer a similar program early next year.

• More than 100 Percent Financing. Countrywide Home Loans offers 103 percent financing with its Zero Down Plus program. GMAC has said that it will buy loans from local lenders for as much as 107 percent of the purchase price -- this means you can buy a home for $150,000 and, if qualified, obtain a loan for as much as $160,500. The additional money can be used for closing costs.

• 125 and 150 Percent Loans. Yes, amazingly, there are lenders out there who will finance the house and a whole bunch more. Such loans are generally not recommended because interest payments for loan amounts above the value secured by real estate may not be deductible -- see a tax pro for specifics. Also, if one needs to move it may take years before the equity value of the property is sufficient to repay the excess loan amount.

Want to own a 100-acre golf course in Maine? Just complete a 200-word essay -- and accompany with a $200 entry fee -- and you could win the Capital City Golf Course in Augusta as well as a an 11-room house, a clubhouse, and other buildings. For details, press here.