Page 54 - FOP August 2019 Magazine

Is a low down payment mortgage right for you?
KIKI CALUMET
If you’re like most first-time homebuyers, when it comes to finding a home loan, one obstacle tends to get in your way more than most. We’re talking about down payments. High down payment requirements can serve as the first and biggest roadblock for those who might have trouble saving up enough to get a home loan.
Federal Housing Authority (FHA) and VA loans offer some low to no down payment loans, but they aren’t accessible to all. Here, we’re going
• Attractive for first-time homeowners
Cons
• Higher credit score requirements (about 620) than an FHA loan
• Cannot be used for homes that include multiple units or investment properties
• Requires private mortgage insurance (PMI)
Comparison with FHA loans
FHA loans were designed to help more Americans buy houses rather than rent them. As such, they have previous- ly allowed buyers more flexibility than prior conventional loan standards. These loans are borrowed from tradition-
al lenders but insured by the FHA.
However, now that Conventional 97 and HomeOne
loans have set standards for conventional home loans with down payments as low as 3 percent, how do FHA loans compare? Here, we break down the unique advantages of both
kinds of loans.
Let’s start by looking at the FHA loan advantages, particularly
in comparison to the Conventional 97 loan:
• Typically lower interest rates
• Minimum credit score requirement of 580
• Higher loan insurance premiums, as it requires an upfront
fee and permanent mortgage insurance
• Flexible qualification criteria
• Accessible for those with with DTIs as high as 51 percent
• FHA loans are assumable
In comparison, here are some of the advantages of Conven-
tional 97 loans:
• Private mortgage insurance is required initially but can-
cels as soon as the overall loan-to-value ratio reaches 78 percent, unlike FHA loans where the mortgage insurance premium (MIP) is permanent and can never be canceled. (FHA borrowers must pay a upfront MIP, plus an ongoing monthly payment to compensate for the increased risk of the low down payment.)
• House must be owner-occupied for at least one year.
• Minimum down payments of 3 percent are available, which is .50 percent lower than what FHA loans require
(3.5 percent).
• Higher maximum loan amounts are available. (Up to
$484,350 versus $368,000 on single family properties.) FHA loans are slightly more accessible, due to more flexible credit and and DTI requirements. However, conventional home loans with lower down payments can end up being the more cost-effective loan choice for new homeowners, thanks to their lower down payments and the ability to cancel the mortgage in- surance. They typically do have slightly higher interest rates, but it gives low down-payment borrowers an additional program to
choose from.
Kiki Calumet of A&N Mortgage prides herself on her expert knowledge of the mortgage industry and the relationships she has built during her two decades in the business. As a long-time sup- porter of the Chicago FOP, Kiki has proven that financial services are most effective when taking clients’ personal goals into mind. She has been named as one of the top 1 percent of loan officers
in America by Mortgage Executive Magazine, and has earned Chicago Magazine’s Five Star Professional Award for the past nine years. She can be reached at 773-305-7010.
to look at the latest option: conventional mortgages with down payments as low as 3 percent. We’re going to look at what you need to know about them and whether they might work for you.
What is a conventional home loan?
Simply put, a conventional home loan is one that doesn’t have any kind of guarantee or insurance provided by the feder- al government. As such, conventional loans follow the require- ments set out by the two larger mortgage loan buyers in the U.S. — Fannie Mae and Freddie Mac.
Down payments for a conventional home loan
There are no set guidelines for what is considered a standard down payment when it comes to conventional home loans. How- ever, they usually require down payments that are in the 5 to 20 percent range.
Some conventional loan programs now offer down payments as low as 3 percent of the overall value. Exceptions that fall into the lower down payment option include the Conventional 97 loan and the HomeOne program, which offer 97 percent of the property’s total value — meaning that buyers have to pay only a 3 percent down payment.
What are Conventional 97 and HomeOne loans?
Here are a few key features and facts you need to know about both types of loans:
• Conventional 97 loan (offered by Fannie Mae): Up to 97 percent financing on loans with a $484,350 maximum loan limit, eligible for those with a credit score of 620 and above who have a debt-to-income ratio, or DTI, of 43 percent or lower. It’s eligible for single-family homes, planned unit development (PUD), condos, and townhomes. This is only available to owner-occupied buyers, and one of the bor- rowers cannot have owned a house in the 36 months prior to applying.
• HomeOne loan (offered by Freddie Mac): Up to 97 per- cent financing on 30-year fixed-rate loans for a primary residence. There are no income or geographic limits on where you can apply for a HomeOne loan. There are no mortgage reserves required, but at least one of the bor- rowers must be a first-time homebuyer, and all borrowers must occupy the property. However, borrowers can still own other properties.
Pros and cons of a low down payment conventional loan
Like all loans, conventional loans with 3 percent down pay- ments have their own unique advantages and disadvantages to consider:
Pros
• The 3 percent down payment makes it much easier to get a loan; that’s even lower than the 3.5 percent down payment requirement for an FHA loan
54 CHICAGO LODGE 7 ■ AUGUST 2019
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