No More Piggybanks
By Jon Dougherty
Our area is unique, whether it’s food, football, golf or more. But when it comes to financing homes, we have one major habit in common with the rest of America – no savings. The actual “personal savings rate” in America, according to the U.S. Commerce Department, is a negative 1%. Simply put, the average American tends to spend all of their income and then some. According to local mortgage lenders, the majority of us in Lee County are no different.
When it comes time to buy a house, no savings means no down payment. No down payment means 100% financing. This is usually accomplished by using a regular mortgage coupled with either seller assistance with some costs, a simultaneous home equity loan or some other type of down payment assistance.
100% Financing in Our Area?
The percentage of home buyers in our area that purchase houses with no down payments seems to range from 40% to 20% of the purchasers. The 40% number was reported by a major national mortgage lender that funds a large percentage of loans in our area. The 20% was reported by a new, local bank. While 20 years ago a 20 percent cash down payment was normal, today it is the exception. There are several reasons that down payments are lower today. With average purchase prices of $150,000 to $400,000 a 20% down payment would be $30,000 to $80,000 in cash plus closing costs. With the cost of cars, kids, health insurance, taxes, college and more, that is a substantial amount of extra money, even for those of us who do save a little each paycheck.
Many homebuyers are looking to the appreciation in their present house to give them the down payment for their new purchase. This works well if you have kept the house long enough. Sometimes, however, families want a larger house just a year or two after they purchased their existing house. Normally, the appreciation is not there, yet.
What can you do if you do not have a large down payment saved up? Find a lender that knows how to finance with little or no down payment. Rest assured, here in Auburn/Opelika it is done every day. From the lenders that we spoke with, a range of down payments of 10% down to 0% down accounts for almost 90% of the financing done in our area.
Credit Scores
If you think that these programs are reserved for the “credit elite” that have Credit Scores (also known as a Beacon Score, Emperica Score, or Fico Score from Fair, Isaac and Company) of 750 and up – you would be wrong. Prime lenders in our area are doing 100 % financing with scores of 660 and up.
Does this mean that you should not make a down payment even if you can afford to do so? Not at all. Mortgage companies are in the business of lending money based upon the risk of the transaction. This includes your credit and ability to pay but also the amount of money you are borrowing compared to the value of the house.
What is LTV?
This is know as the Loan to Value (LTV) and the higher it is, the more risk the mortgage lender is assuming. Normally a higher LTV means a higher rate which means a higher monthly payment for you.
If you purchase a house for $200,000 and put down $100,000 cash from savings (hypothetically, of course) and then got a mortgage for the other $100,000, your LTV or “loan-to-value” would be 50% (the $100,000 loan divided by the $200,000 value). The mortgage company has very little risk in this transaction and would reflect this in a lower rate to you.
But if you bought the same $200,000 house with $10,000 (5% of the purchase price) down and got a mortgage for $190,000, your LTV would be 95% and the risk to the mortgage company is higher.
The Magic 80%
Because of the increased risk to the mortgage company, a mortgage loan of above 80% LTV normally includes PMI (private mortgage insurance). This is a slight charge to you for insurance that helps reduce the risk to the mortgage company. When your mortgage is paid down below 80%, this extra charge is cancelable and usually done automatically by the lender.
Today, several lenders have used this 80% benchmark to design 100% financing programs. One typical program is described as an “80/20” meaning that the lender is offering a mortgage loan of 80% LTV along with an equity credit line on the new house of 20% LTV. That is 100% financing for you and among other benefits, this program avoids any additional PMI charges at all.
Stop Guessing
If you are in the market for a house, go to a qualified lender first. Ask about the programs that best fit your needs. Mortgage lenders are competing for your business. More importantly they know how to help you get financing at the lowest rate. Unless you are one of the rare buyers that is paying all cash for a house, your mortgage lender is the person that will help you afford your dream home.
We welcome your comments, questions and suggestions.
Send them to Jon Dougherty
|
|
