Short on Cash? You Still Have Down Payment Options!

Short on Cash-You Still Have Down Payment Options-150x150Taking out a mortgage loan can be very expensive for most home buyers. Between all the fees and the down payment, you will usually have to spend tens of thousands of dollars before you can even move in your new home. The down payment that you make on your purchase will influence how much your monthly payment will be, and also how much you will be spending overall on your mortgage loan. Many times, the down payment will be the only thing standing between you and home ownership. Coming up with a large amount as a down payment can prove to be very difficult for most people, but, fortunately, there are alternatives that can help you.

The obvious thing to do is to take out money from your savings or sell some or all of your investments to come up with the money for the down payment. But sometimes that’s not possible, either because you have no savings or investments, or simply because you don’t find that to be a good option. In this article, you will find out about other down payment options for when you are short on cash.

Government Insured Mortgage Loans

Government backed mortgage loans, like the Federal Housing Administration (FHA) loans, the United States Department of Veterans Affairs (VA) loans, and the loans offered by the United States Department of Agriculture require a very low or no down payment. Besides this advantage, you won’t be required to pay a higher interest rate or Private Mortgage Insurance (PMI) because you didn’t make a down payment or your down payment was too low.

FHA loans are designed to help people with low incomes, who couldn’t afford a conventional mortgage loan. The loan is insured against default by the Federal Housing Administration, and requires a minimum down payment of 3.5 percent, which is significantly lower than the 10 to 20 percent required on conventional loans.

VA loans help current or former military members become home owners much easier. The loans are backed by the United States Department of Veterans Affairs, and require no down payment to be made by the home buyer who qualifies. The interest rate on a VA loan is comparable to the rates on a conventional loan.

USDA rural development loan are designed by the United States Department of Agriculture in order to increase home ownership in rural areas. Like the VA loan, there is no down payment requirement on a USDA loan, but the loan can only be used to purchase property in a rural area.

Take Out Cash from a Retirement Account

In order to come up with money for a down payment, you can also withdraw cash from retirement accounts, such as IRAs or 401(k)s. If this is your first time buying a home, you can withdraw up to $10,000 by yourself or up to $20,000 if you have a joint account with your spouse. Unless you have a Roth IRA, the money that you withdraw will be taxable, but you won’t be required to pay an early withdrawal penalty.

Taking out money from a 401(k) can also be done without paying a penalty, but your employer will have to okay the withdrawal, and the money will have to be returned within 5 years, with interest.

Get Help from Your Family

Many young home buyers receive help from their families when buying a home, especially if it’s the first time. The money must be received in the form of a gift, which can cover part or all of the down payment. However, you will have to provide your lender with proof that the money used for the down payment was a gift, and not a loan. A letter explaining the relationship between the person that gives the money and the person that receives it and the purpose of the amount given as a gift must be sent to the lender before they can approve the gift as a down payment.

Get Help from Your Employer

Some companies and organizations have come up with programs that are designed to help employees become home owners by giving them the money for the down payment as a low interest loan. These types of loans are like a second mortgage, so you will probably have to come up with part of the down payment. This makes them only useful if you want to make a 20 percent down payment and avoid paying for Private Mortgage Insurance.

Use the Equity in Your Home

Only applicable if you are buying a second home, using the equity in your home is a viable option of coming up with the down payment for a new home purchase. Using the equity as a down payment can be done in two ways: by doing a cash-out refinance or by taking out a home equity loan.

As you have read in this article, there are other options that can help you if you’re short on cash and can’t afford to make the large down payment that will make your interest rate lower and help you avoid paying for Private Mortgage Insurance. It would be a shame for the down payment to be the only thing to come between you and buying your dream home, so, hopefully, these alternatives will make becoming a home owner easier for you.

FHA Mortgages: Pros and Cons

FHA Mortgages-Pros and Cons- 150x150The Federal Housing Administration (FHA) mortgages are designed to help people with lower incomes become home owners. Tight lending requirements make it difficult for people with low incomes, less than perfect credit scores, and tight financial situations to obtain a conventional loan. The Federal Housing Administration insures the mortgage loan against default, so in the event that the borrower can’t make mortgage payments anymore, the FHA will pay.

Pretty much anyone can qualify for an FHA mortgage loan, but the amounts that you can borrow are usually close to median home prices in the area. In order to qualify for this type of loan, your debt to income ratio should be fairly reasonable and you should have a good credit score.

FHA Mortgages- Pros

FHA mortgage loans are not for everyone, but they do have a few advantages over conventional loans. FHA loans make it easier for people who can’t normally afford a conventional mortgage loan to become a home owner. Here are the most important pros of taking out an FHA mortgage loan:

  • It is easier to qualify for an FHA mortgage loan than for a conventional mortgage loan. Conventional mortgage loans have strict qualification requirements, making it harder for people with low to medium incomes and not so perfect credit scores to qualify. FHA mortgage loans, on the other hand, are designed by the government to help these people, by having less strict income and credit score requirements.
  • FHA loans require a much smaller down payment than conventional loans. Regular mortgage loans require a 20 percent down payment in order to avoid paying for insurance. 20 percent of a loan value can be a pretty hefty chunk of money, depending on how much your mortgage loan is for. Down payments for an FHA mortgage loan can be as low as 3.5 percent, making it easier for more people to become home owners.
  • FHA loans don’t come with a pre-payment penalty. Many conventional loans come with a pre-payment penalty, meaning that you will have to pay a penalty fee if you decide to pay off your loan before the end of its term. FHA mortgage loans don’t come with such a penalty, so you can pay off your loan or refinance at any time.

FHA Mortgages- Cons

FHA mortgage loans are designed to help people who can’t otherwise afford a conventional mortgage loan. Because of this, FHA loans come with a few cons, as well. Here are the most important:

  • You can’t borrow as much money as you would with a conventional loan. Because the Federal Housing Administration insures these loans, they will have to pay in case the borrower defaults. That’s why the amounts that you can borrow are lower than what you would be able to borrow on a conventional loan.
  • Many sellers don’t want to deal with buyers using an FHA mortgage loan. When the housing market is hot, sellers in a sellers’ market receive multiple offers on their properties. FHA mortgage loans are seen as a hassle by sellers, so your offer might be refused just because the seller doesn’t want to deal with an FHA loan.
  • You will have to pay a mortgage insurance premium. Conventional loans require the borrower to pay private mortgage insurance if the down payment is lower than 20 percent. FHA insured mortgage loans require an initial insurance payment of 1.5 percent of the loan value, and a monthly mortgage insurance premium of .5 percent of the loan value.

Mortgages backed by the Federal Housing Administration are a great way for those with lesser means to become home owners. Depending on each borrower’s situation, this type of loan can be a good or a bad choice. It is up to the home buyer to evaluate his or her financial situation and decide if an FHA loan is the best choice, or it would be better to look for a more conventional loan.

Do You Live in a Rural Area? If Yes, a USDA Home Loan is for You!

Do You Live in a Rural Area-If Yes a USDA Home Loan is for You- 150x150In an effort to increase home ownership in rural areas, the United States Department of Agriculture started offering USDA backed loans back in 1991. By using a USDA loan, you can purchase, refinance, repair, or relocate a home, as long as the home is located in a rural area. This type of loan is designed to help only certain individuals, but it is very similar to other government backed mortgage loans, such as FHA (Federal Housing Administration) and VA (Department of Veterans Affairs) loans.

This type of loan was initially designed to help people living in rural areas become home owners, but it can also be used to finance multiple types of properties and even businesses. For those who qualify, the USDA offers 100 percent financing with low interest rates, and loan terms from 30 to 38 years.

Advantages to Choosing a USDA Home Loan

USDA home loans are designed to help people, so they will have more advantages when compared to other types of mortgage loans. Here are the most important benefits, which should help you decide if a USDA home loan is the right choice for you:

  • The biggest benefit of the USDA home loan is that you receive 100 percent financing, which means that you won’t have to make a down payment. Down payments on conventional loans are usually 20 percent of the loan value, and one of the main reasons some people can’t afford to buy a home through a conventional mortgage loan. The only other loan that offers 100 percent financing is the VA loan, which is designed for current military members or veterans.
  • Another benefit is the possibility of financing the closing costs into the loan. This is also a large advantage, because closing costs can sometimes be fairly high, and very hard to come up with, especially when moving into a new home. Most conventional loans will require you to pay the closing costs before being granted the loan, which makes it harder to qualify for those who can’t afford to pay these costs.
  • Buying a home with less than perfect credit score will attract higher interest rates, or even make it impossible for you to qualify for a mortgage loan. With the USDA loan, the credit requirements are less strict, giving people, who otherwise couldn’t qualify for a mortgage loan, the possibility of becoming home owners.
  • USDA home loans also come with lower interest rates. This means that not only you will be paying less monthly, but the overall value of your loan will be lower than if you were getting a conventional loan. Even if interest rates on conventional loans are lower at the moment, you will still get a better deal on your rate by choosing a USDA home loan.

Applying for a USDA Home Loan

Whether you are purchasing a home, refinancing, improving your home, or just taking advantage of the cheap land prices, doing it through a USDA home loan will bring you great benefits. However, to qualify for this type of loan, you need to meet a few criteria and be aware of the process. Here are the steps to applying for a USDA home loan:

  • Select one of the two loan options that the United States Department of Agriculture offers. If your income is at or under 115 percent of the median income in the area, then you could qualify for the Guaranteed Housing Loan. If your income is very low or moderate, usually below 50 percent of the median income, you will be able to apply for a Direct Loan, or a Section 502 Loan. The home that you are planning to buy with a USDA home loan must be your primary residence and located in a rural area.
  • Maintain your credit score at a decent level. You won’t need to have a perfect credit score in order to be granted a USDA home loan, but you will encounter problems if your credit score is very low. Foreclosure or bankruptcy on your credit report can even make it impossible for you to qualify for a USDA home loan. Also keep a low debt-to-income ratio or your lender will consider you a bigger default risk and refuse to give you the loan.
  • Make sure that the home that you consider buying is located in an eligible area. Because they are designed to increase home ownership in rural areas, USDA home loans will only be approved for those who purchase homes in certain areas.

Applying for a USDA home loan is no different than applying for a conventional mortgage loan. The big difference is that this type of loan comes with greater advantages, the biggest one being the cost. The downside is that you can only use the USDA home loan to purchase a home in a rural area but, depending on each individual’s plans and situation, this might not be a downside at all.

Balloon Loans: Are They Worth It?

Balloon Loans- Are They Worth It- 150x150Balloon loans are a great choice for home buyers who wish to pay a fixed low interest rate on their loans. With a shorter term than the typical mortgage loan, balloon loans must be repaid in five to seven years. Payments for a balloon loan are calculated in the same way that payments for normal loans are calculated but, because the term is only 5 to 7 years, the borrower will have to make a large payment at the end of the term.

This characteristic makes balloon loans an ideal choice for borrowers who are expecting to come in possession of a large amount of money or a higher salary in the near future. This type of mortgage loan also benefits people who move a lot, and do not intend to keep a home for longer than a few years.

There are basically two types of balloon mortgage loans: regular mortgage loans that have a balloon clause, and actual balloon loans, where the borrower has to make a large payment at the end of the term, after making normal monthly payments for five to seven years.

Advantages of Balloon Loans

Balloon loans are not for everyone, but there are several key advantages to using this type of loan. Here are the most important ones:

  • Low down payment. One of the main advantages that a balloon loan has is the low down payment requirement, which allows a larger number of borrowers to qualify. If you are not doing very well financially, but are expecting to receive a large sum of money in the near future, then balloon loans might be a great choice.
  • Low interest rate. Considered by most lenders to be a low risk loan, a balloon loan has the same or an even smaller interest rate than a conventional loan.
  • The large payment can be refinanced. If a borrower is unable to pay the large amount due at the end of the balloon loan term, he can refinance, but he will most likely have to pay higher interest rates than usual.

Disadvantages of Balloon Loans

Every type of loan also has a few disadvantages. When shopping around for loans you must take both advantages and disadvantages into consideration. Balloon loans have the following disadvantages:

  • Large payment at the end of the term. When the loan matures, normally in 5 to 7 years, the borrower is required to pay the remaining sum. Because the term is so short, the remaining amount will be quite large, and can create difficulties for borrowers who didn’t plan accordingly. Borrowers must have access to a large sum of money in order to make this last payment, if they decide to go with a balloon payment.
  • Bigger risk of losing your home. You will risk losing your home with any type of loan, due to poor planning or unforeseen events, but the risk is much greater with a balloon loan. Not only will you need a large sum of money to make the last payment, but being unable to qualify for a refinance will increase your risk of foreclosure.

Balloon loans are obviously risky and not recommended to most home buyers, but they can be the correct choice for those who don’t plan on keeping a home for long, and for those who are expecting to receive a large amount of money in the next few years, or receive a large pay increase.