If you are a first-time homebuyer, be prepared to have at least 5% of the purchase price sitting in your bank account BEFORE you start looking.  As a basic proposition, lenders now want borrowers to have cash on the line when they buy a home. “Skin in the game” is the phrase of the day.  So having accumulated funds for a down payment and closing costs is, once again, the major concern for first-time homebuyers. 

The best choice for most first-time home buyers with limited cash available is FHA, which, like the Phoenix, has risen from its ashes to become the most important source of mortgage funding for first-time buyers.  With FHA, a downpayment of as little as 3.5% of the purchase price is required, and that can come as a gift from a family member, an employer or from a non-profit institution or government grant.  

First-time homebuyers eligible for the $8,000 federal tax credit and who use FHA financing have access to a mechanism that can advance them the credit to use at settlement toward closing costs or an interest rate buydown.  The credit cannot be used for the downpayment.  While FHA has no credit score requirements, individual lenders who process FHA loans will usually have their own score standards.  Expect scores below 660 to pay a price; scores in the 620 range can expect another “hit” to the price; approval for loans with scores of 580-620 is dicey.  Scores under 580 may find a lender but the premium may well be expensive.  Most traditional banks will not, currently, originate a loan with a score under 620. 

First-time buyers with non-traditional credit histories (i.e., have no credit cards and pay for everything in cash) have some hope with FHA.  Alternative  scoring assesses risk based on a person’s rental and utility payment history when there is not enough credit information for a regular FICO credit score.  Expect to pay a higher rate.  FHA will insure to a maximum loan amount of $271,050 anywhere in the U.S. and up to $729,750 in high-cost areas like here in the counties in Maryland and Virginia close to D.C.  Loans over the maximum “conforming” limit for the area will pay an additional premium. 

Borrowers pay an upfront fee of 1.75% of the loan amount as an initial mortgage insurance premium (MIP).  The seller is permitted to pay this or it can be rolled over into the loan amount.  Another 0.55% premium is paid monthly (1/12 x 0.55%). 

If you are a veteran, qualifying reservist or National Guard member, you have the rare no-downpayment option available.  A veteran with full eligibility can purchase a home costing up to $417,000 anywhere in the U.S without a downpayment.  VA financing and the VA program does this by guaranteeing the last 25% of the loan.  Temporary legislation enables VA loans through 2011 to be available without a downpayment for loan amounts up to 125% of the median price for a single family residence in a county.  This has been very big in some high cost parts of the country.  VA now sports no-downpayment loan maximums of up to $1,094,625 in the very highest cost areas of the lower 48 states.  The VA program comes with significant upfront (“funding”) fees for those making no downpayment, but motivated sellers will often pick up the tab.  The funding fee must be paid in full or rolled into the loan. Fees are lowest for those using the VA program for the first time or making a downpayment and are waived entirely for veterans with a service-connected disability. 

With both VA and FHA, there is flexibility with respect to the “holy trinity” of income, credit history and financial reserves. A ding in one of these areas can be offset by strength in one or both of the others.  Ultimately, for FHA and VA to be approved, a mortgage application, the loan has to make financial sense.  What about programs at Fannie Mae and Freddie Mac? There are 100% financing programs on the books, but these rely on private mortgage insurance (PMI) and mortgage insurers are refusing to underwrite 100% loan-to-value purchases.  The option of using a second trust to achieve 100% financing is also dead since there is no secondary market to purchase these second mortgages.  If you want to buy using conventional Fannie and Freddie financing, expect to make a minimum downpayment of 10% and have at least a 720 credit score.  PMI companies are especially risk averse these days and may deny mortgage insurance coverage even if the lender has approved the loan. © 2007, Real Estate Information Services, Capitol Assets & Choice Finance®

Contributing writer & Loan Officer for Maryland, Virginia, D.C.
Eric Strasser, 301-996-5001

This entry was posted on Friday, December 4th, 2009 at 12:42 pm and is filed under 2) General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.