Are you tired of renting? Have you thought about buying a home but don’t have a 20% down payment? Fortunately, that is not a problem. Here are popular loan types and definitions for first time home buyers.
Debt to Income Ratio (DTI): This percentage is your monthly debt obligations as a percentage of your gross income. For example, a person has a gross income of $1,000/month, a car payment of $300 and no other debt. Their DTI would be 30% (Debt \ Income x 100= DTI).
Private Mortgage Insurance (PMI): For most loans that have down payment requirements less than 20%, the buyer needs to pay for PMI in the event they default on the loan. Some loan types allow PMI to be removed once the buyer has 20% equity. For other loan types, the buyer is required to pay PMI for the life of the loan.
Annual Percentage Rate (APR): Most lenders offer similar loans and interest rates, but not all lenders charge the same for their services. The APR is the interest paid on the loan AND the costs of the lender in the form of a percentage for the life of the loan.
Closing Costs: These costs are ON TOP of the down payment. This is the money paid to the lender, and title and escrow company. Closing costs vary but average between 2-4% of the purchase price of the home.
Veterans Administration (VA): VA loans are available to active service members or veterans of the United States. This is a 0% down payment loan AND the buyer does not need to pay for mortgage insurance. A negative for this type of loan is the amount of closing costs required. Not only are they high, but the seller is required to pay some of them. If you make an offer with a VA loan and someone else made the same exact offer with an FHA loan, the seller would net more money if they went with the FHA buyer.
United States Department of Agriculture (USDA): These loans are designed to serve rural communities. The loan requires 0% down payment, a credit score of 620 or higher and buyer’s income cannot exceed 115% of the median income for the area. IF THE HOME HAS A POOL, ANY VALUE THE POOL ADDS CANNOT BE INCLUDED IN THE APPRAISAL.
Federal Housing Administration (FHA): These loans are best for buyers with a lower credit score and higher DTI. Borrowers need a credit score of 580 or higher and their DTI can be as high as 57%. With only a 3.5% down payment, many buyers like this loan. The biggest downsides are the mortgage insurance remains intact for the life of the loan and the loan amount cannot exceed 115% of the median home price in the county.
3% conventional: This loan is best suited for buyers with a credit score of 680 and higher because of loan costs. This loan has a lower down payment requirement than an FHA loan and once you have 20% equity the PMI can be removed. A DTI of 43% is recommended but can go as high as 50%.
1% conventional: This loan typically requires a 680 credit score or higher and 45% DTI or lower. The person obtaining the loan also needs to earn less than the median income for the county they are buying in.
There are many low money down loan types that make buying a home much more affordable. If you are interested in becoming a homeowner, contact your local Realtor and ask them for lender suggestions. If any of the loan types mentioned in this article interest you, be sure to ask the lender if they offer that loan.
John Jennings, III
BRE #01982171
