More 3% Down-Payment Options Surfacing From Lenders

More 3% Down-Payment Options Surfacing From LendersGood news for prospective homebuyers - it is continuing to get easier for homebuyers to purchase a home with more down-payment flexibility.

As recently reported in MarketWatch, more lenders are lowering their down-payment requirements, allowing borrowers to commit 3% (or less) of a home's purchase price to get a mortgage. We are also seeing more lenders that are waving mortgage-related fees, and allowing for down payments to be made by other parties, like family members.

We have previously seen lenders requiring down payments of at least 20% since the beginning of the recession. Naturally, this is a huge leap forward which will open doors for many more first-time homebuyers.

What Kinds of Buyers Receive 3% Down Options?

The 3% down options are aimed directly for buyers with these two qualities:

  1. Good credit scores
  2. Steady incomes

Interestingly enough, these options are usually targeted at buyers who live in expensive housing markets. "Small" down payments in these types of markets will likely equal tens of thousands of dollars.

The Ins and Outs of Low-Down-Payment Mortgages

Low-down-payment mortgages aren't really all that new of a concept. The FHA currently insures mortgages with down payments as low as 3.5% (for homes meeting specific requirements), and now the option to put down even less with the recent Fannie Mae and Freddie Mac mortgage shift, driven by an Obama administration effort to expand homeownership affordability.

Note that small down payments put buyers at risk for owning more on their mortgage than the property itself is worth, should home values decline.

Costs of low-down-payment mortgages can vary significantly. This usually depends on whether or not the lender plans to sell their mortgage to Fannie or Freddie, or if it plans to hold the loan on its books (in addition to borrowers' qualifications). Ensure that you end up working with a trusted mortgage lender in your area.

Understand that borrowers often have to pay an extra fee for private mortgage insurance. This fee will protect the lender from incurring significant losses should the borrower default, thus enabling a low down payment. You will often see this fee assimilated into the monthly mortgage payment, or (more rarely) as an upfront charge.

If you are looking to pay less for your mortgage and maintain a lowered down-payment, here are 3 key attributes of this type of loan:

  1. Borrower has a higher credit score
  2. The home price generally requires a smaller loan amount
  3. A the mortgage is generally fixed-rate (e.g. a 30-year mortgage)

Above all, ensure you are working with a trusted mortgage lender in your area that will work to find you the most sustainable mortgage option for your situation. For those looking for a lender in the Chicagoland area, click here for a list of our recommended lenders.

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