Here’s the low-down on buying a house with a minimal down payment.
These are excellent loan programs. I’ve highlighted some advantages of each.
- Only 3% down payment.
- You don’t have to be a first-time home buyer.
- Can be a house or condominium.
- You get the same low interest rate as the buyers with 20% down.
- Reduced monthly mortgage insurance fee.
- There is an income limit, unless the neighborhood is an area with low home ownership (called under-served area).
- 620 credit score or higher.
- Money comes from Freddie Mac (get the loan through your mortgage broker).
This is Fannie Mae’s version of HomePossible.
- 680 credit score or higher.
FHA – Federal Housing Administration
- Down payment is 3.5%.
- 580 credit score
- Bankruptcy Chapter 7 okay after 24 months discharge.
- Can be a house, condominium, or manufactured home.
- No education class required.
- Has an upfront mortgage insurance fee of 1.75% that is rolled into the loan.
I recommend speaking with a mortgage broker who will find the best and lowest priced loan that is available for you. Only a mortgage broker is required by federal lending law to get you the lowest interest rate available. Why? Because mortgage brokers shop wholesale lenders for you. Banks, credit unions, and direct lenders use their own money, so they don’t have the wholesale options. Therefore, they are allowed to charge you whatever they like (within limits). For example, today a home buyer received a quote from a direct lender (rhymes with Build Mortgage) with an interest rate of 5.5% whereas the mortgage broker’s rate is 4.5%.
If you are in Washington or California, I am licensed in those two states and would be happy to help you! (NMLS # 1284134)
You can apply online here.
Which is better for you? The HomeAdvantage loan or the FHA loan? Here is a quick and easy comparison.
Good to know: You do not need to be a first-time home buyer to qualify for either of these programs. As long as you will occupy the house as your primary residence for at least one year, you can use either HomeAdvantage or FHA.
- Has an income limit to qualify. In WA, it is $97,000 household income. In CA, it varies by county.
- Provides the cash for you to use as a down payment. (The down payment will be either 3% or 3.5%.)
- The down payment is not a gift. It is an interest-free loan that you pay back when you pay off your mortgage — whether it’s by selling the house, refinancing, or paying it off in 30 years.
- To receive the down payment from HomeAdvantage, you must use a HomeAdvantage mortgage. This mortgage will have a higher interest rate by about .25%. So yes, you get an interest free down payment, but you pay a little more for the mortgage.
- The way to get a HomeAdvantage program is through a loan officer who has taken the training class and is authorized by the state to do the loan. (Such as myself. I am licensed in WA and CA. In CA, the program is CADAP and is similar to HomeAdvantage.)
- Attending a home buyer education seminar is required. Your loan officer will direct you to an available class. In WA, the class is free. In CA, there is a nominal fee.
FHA (Federal Housing Administraion) Loan
- No income limit.
- Down payment is 3.5%. It can come from your own funds, a gift from family, or an acceptable down payment assistance program.
- An Upfront Mortgage Insurance Premium (UPMIP) is required. It is 1.75% of the loan amount. Most people roll it into the loan, making the mortgage slightly higher. Because it is amortized over 30 years, it increases your monthly payment by only a small amount.
- You might have a smaller monthly payment with the FHA loan, depending on credit score and what you qualify for.
- No education class required.
- Because you provided the down payment, you do not have anything to pay back when you sell the house or pay off the mortgage.
HomeAdvantage (and CADAP) is a great program if you can’t save money for a down payment as fast as home prices are rising. The FHA loan is a great program if you can provide your own down payment but don’t qualify for the conventional loan.
Thank you for stopping by my blog. If you are in WA or CA, I am happy to provide you with a free analysis and cost estimate worksheet for the best loan you qualify for. That might not be either HomeAdvantage or FHA. As a full-service mortgage loan officer, I have an entire “smorgasbord” of loan programs to choose from.
Good news for home buyers using the FHA loan program! The annual mortgage insurance premium (MIP) required on this loan is being cut by half a percent for all new loans starting January 26. The expectation is that this will save the average home buyer $900 per year by reducing their monthly payments.
The MIP is the fee charged to the borrower to compensate for the low down payment. FHA requires only 3.5% down. Because there is little equity in the property, insurance is required to protect the lender in case of default.
This new fee decrease affects the 30-year fixed rate loan (as well as the 25-year and 20-year term). The 15-year loan, which has a lower premium already, remains unchanged.
FHA 30-year Fixed Rate MIP Reduction
Loans less than $625,000, 3.5% down: MIP reduced from 1.35% to 0.80%.
Loans less than $625,000, 5% down: MIP reduced from 1.30% to 0.85%.
Loans at or above $625,000, 3.5% down: MIP reduced from 1.5% to 1.0%.
Loans at or above $625,000, 5% down: MIP reduced from 1.55% to 1.05%.
How the Prepayment Penalty Works
Regardless of the day your FHA loan ends, you have to pay interest on the loan through the end of the month. This means if your refinance or sale closes on the 10th of the month, FHA keeps on charging you for the additional 20 to 21 days till month-end. This is considered to be a prepayment penalty.
Prepayment Penalties Have Been Hidden
Near the bottom of the Truth-in-Lending Disclosure, it says:
Prepayment: If you pay off early, you
may or will not have to pay a penalty
The lender checks the box next to may or will not. Most lenders check the box for will not, thinking that the FHA prepayment penalty is not like the sub-prime prepayment penalties. But the FHA does have a prepayment penalty, and the may box should be checked accordingly.
Thus, most home owners with a FHA loan have had their prepayment penalty hidden from them.
FHA Will Discontinue Prepayment Penalties
The good news is that for loans that close on January 21, 2015 or later, there will be no prepayment penalty, regardless of when you refinance or close on your sold property.
For everyone who already has an FHA loan, you’ll want to time the closing of your next loan to be on the last day of the month to avoid paying extra interest.
1) FHA’s profits are up and the administration is operating comfortably in the black, and
2) FHA changed their rules so that the mortgage insurance fee is permanent and cannot be waived no matter how much equity the homeowner accrues. With a conventional loan, the mortgage insurance fee stops once the home owner has 20 – 22% equity; but with FHA, it lasts for the life of the loan.
In response to their request, lenders received a big, fat NO. Carol Galante, the FHA Commissioner, said the current fees are “absolutely necessary,” and that “now is not the time to roll back premiums.”
In the future, FHA hopes to launch a program that will further increase the quality of loans. This program will be paid for by a fee to the lenders.
I have to ask, if lenders receive a new fee from FHA, who do you think they are going to pass that additional cost onto?
Now that this FHA program (commonly called a first-time home buyer’s loan) carries higher mortgage insurance fees and permanent monthly fees, how much more will home buyers accept before they say “NO” to FHA and choose a conventional loan instead?
Currently, a conventional loan requires a 5% down payment instead of 3.5% down for FHA. But if the monthly fees (on top of the upfront FHA fee) grow too high, home buyers may well decide the extra time it takes to save for the larger down payment is worth the wait.
If you used an FHA loan (3.5% down payment) when you bought your house, get out the Truth-in-Lending form. Near the bottom, you’ll find in bold Prepayment Penalty. Is the box checked for may have or for will not have a prepayment penalty? Regardless of which box is checked, if you close your loan on any day of the month except for the last day, you will pay a penalty.
Question: “Can they do that? My documents says I will not have a prepayment penalty!”
Answer: Yes they can, and I guarantee you that they will. If you pay off your mortgage in the middle of the month, FHA will charge you interest for the entire month, no matter when you vacate the loan. So essentially, you are paying FHA extra interest payments even after the loan is closed. This is a prepayment penalty.
How They Keep It Hidden
When they calculate the pay-off balance on an FHA loan, they roll in those extra days of interest on what you owe. If you wonder why your pay-off figure seems too high, the FHA prepayment penalty could explain it.
How to Avoid the Prepayment Penalty
If you have an FHA loan, you need to close on the last day of the month. If that is not possible, close as near to the last day as you can in order to minimize your financial penalty.
FHA is Making Millions on Hidden Prepayment Penalties
In just one year alone (2003), FHA pocketed an extra $587,400,000 in profit from home sellers’ prepayment penalties. Over the course of the last decade, that multiplies to billions of dollars charged to unsuspecting first time home sellers and home owners refinancing.
Stop the Madness!
In 2011, U.S. Senator Ben Cardin (MD-D) tried to pass a bill stopping FHA’s prepayment penalty. Unfortunately, FHA poo-pooed the bill and it failed to pass.
Now the Consumer Financial Protection Bureau (CFPB) is pressuring FHA to stop the penalty. They say it’s not fair, and they want FHA to knock it off.
FHA is Fighting Back
FHA says if they are forced to drop the penalty, then new borrowers “can expect to pay a slightly higher rate.”
Thanks a lot FHA. Now you’re going to charge ALL home buyers at the beginning of the process instead of only the ones who don’t close at the end of the month?
New Policy Won’t Affect Existing Home Owners
If the new policy passes — and I think it will — it won’t affect current home owners. The existing loans will still be subject to the financial penalty. So be vigilant about your closing date. Make sure you close at the end of the month to avoid the paying extra.
(FHFA was established by the White House after the mortgage meltdown. Their mission is to ensure a safe mortgage market by setting rules for government sponsored enterprises. Think Fannie Mae and Freddie Mac.)
There are two mortgage fees they said would increase in 2014:
1) The Guarantee Fee. This is a fee charged by Fannie Mae and Freddie Mac for bundling, servicing, and selling mortgage-backed securities to investors. More detail is here. This fee increase was going to be passed on to mortgage borrowers, home buyers.
2) Credit related fee increase. A fee for having a credit score below the top tier. In other words, a charge to offset the risk of lending to you if you don’t have “A” credit. Currently, top tier credit in the mortgage world is 740, but they have proposed raising that to 800.
After the announcement, the Mortgage Bankers Association sprung into action in protest. They are actively working with policy makers to prevent a pricing increase for home buyers that could hurt our fragile housing market.
Just because we have seen some recovery, it doesn’t mean the market is robust and can withstand a punch in the gut like a major fee increase. So the issue is being reviewed now. We’ll have to wait to see how it all plays out.
What is the Loan Limit in Your County?
In the meantime, some counties with higher median home prices than average have suffered a loan limit reduction. I blogged about this possibly happening earlier this year, as you might recall. In the highest-cost areas where the loan limit was $729,750, the limit has been reduced to $625,500. Here is the link to the look-up table for FHA loan limits by county.
You are invited to sign up to this blog to receive important information about mortgages and home buying in 2014. I blog once a week, usually on Tuesday, so you aren’t flooded with too much in your in-box.
Can you imagine?! You pay off your mortgage (either by refinancing or selling the property), and even though you have a $0 balance, the lender keeps on charging you interest every day for the rest of the month.
“Can they do that?” you ask.
Yes, FHA (Federal Housing Admin) is and has been doing that to all their first time buyers who used their 3.5% down FHA loan.
This sneaky practice netted FHA an extra $587,000,000 in revenue–in one year alone, according to an article in the Washington Post by Kenneth R. Harney. Over the years, it’s added billions to their coffers.
What this amounts to is a prepayment penalty. If a home owner pays off their balance before the end of the month, they are penalized for the “early payment” and still have to pay their entire month’s payment. However, this is not disclosed to people up front. In fact, most of the time it is a BOLDFACE LIE. On the Truth-in-Lending form (TIL) near the bottom where there is a box to check yes or no for a prepayment penalty, the majority of banks and lenders check no prepayment penalty.
By contrast, conventional loans and VA loans stop charging their borrowers on the day the loan is paid off.
The National Association of Realtors has been complaining about FHA’s prepay penalty for years — to no avail. But now the Consumer Financial Protection Bureau has added its muscle to the fight, and it looks like the FHA might be forced to stop grabbing extra dollars out of their customers’ wallets. However, the CFPB has given FHA a year to comply with their request, so we’ll have to wait to see how it all plays out.
In the meantime, if you are paying off an FHA loan, plan your closing for the end of the month so you don’t pay any (or many) extra days of interest payments.
FHA (Federal Housing Administration) is a government sponsored enterprise that provides money to banks and mortgage lenders. This price increase comes from FHA; therefore, it doesn’t matter which lender you choose, the price increase is now set by federal banking law.
Change #1: Begins April 1, 2013
For all FHA loans with a down payment less than 5% down, the monthly mortgage insurance fee (MI) has increased. Fortunately, it is a small increase of 0.1%. Previously, the monthly MI was calculated at 1.25% of your principal and interest payment. Now it is 1.35%.
This small increase to all home buyers will add up to a lot more profit for FHA, who has been struggling since the mortgage meltdown to be profitable.
Most home buyers taking an FHA loan are putting down 3.5%. That is the #1 attraction to the FHA loan. If you have 5% to put down, you’re going to want to take the conventional loan instead. The only reason a person with 5% to put down would take the FHA loan rather than the conventional loan is if their credit could not qualify for conventional. FHA is more generous with credit requirements.
If your FHA loan hasn’t closed yet, but your loan officer got the FHA case number prior to today, April 1st, then your MI will be at the lower rate of 1.25%.
Change #2: Begins June 3, 2013
This is the biggest and worst change. For a 30-year fixed rate with less than 10% down, FHA will collect the monthly MI payment for the life of the loan.
This means you do not get to cancel the MI fee when you have 22% equity. You could have 90% equity and you will still be paying that pesky MI fee that protects the lender in case you default on the loan.
Setting You Up to Refinance
If you take an FHA loan, it’s like you’re being set up to refinance when you have sufficient equity (and credit) to get into a conventional loan. The problem with refinancing is that there is a cost to getting a new loan and you have to start all over again at the 30-year mark (unless you take a shorter term loan).
If the FHA loan is the only one you can qualify for, then it’s better than missing out on becoming a home owner and acquiring more personal wealth through real estate ownership. However, since you will probably want to refinance or sell in the not-so-distant future, your focus needs to be on paying the lowest lender fees possible.
There are still a lot of needless junk fees being charged today. This is one reason I offer my Cost Estimate/Good Faith Estimate review and consultation service. Just last week, I saved a home buyer $751 in lender fees through this service. So please, do your proper shop-and-compare before committing to any certain lender. And then, if you are buying with the FHA loan, you can be confident you know the rules and are getting the best deal you possibly can.
FHA loans have been popular with first-time home buyers who need a low down payment. FHA requires only 3.5 percent down rather than 5 percent down for a conventional loan.
FHA loans are also popular for folks who don’t have a 740+ credit score preferred for a conventional loan, but who still want the same low interest rate.
But beware, the FHA guidelines are slated to tighten up.
New, Stricter Requirements for an FHA Loan
Senator Bob Corker, R-Tenn, has asked the commissioner to impose stricter rules for FHA, as follows:
1) Higher credit score requirement.
Minimum middle credit score of 620. Currently, some lenders will go down to 580 or even lower, but charge a higher interest rate for the additional risk.
2) Longer wait for people who had a foreclosure in the past.
A down payment requirement of 20 percent for those who had a foreclosure within the past seven years. Currently, many lenders allow 3.5 percent down with a wait period of four years after a foreclosure, if there were extenuating circumstances.
3) Lower loan limit.
Drop to $625,500 maximum loan. Currently, the limit is $729,259 in areas of the U.S. where the median value of homes is higher.
What Will Happen
We don’t know what changes the Senate will pass, but we can count on negotiations over these issues; and most likely, a tightening of requirements for the FHA loan. Senate Banking Committee Chairman Tim Johnson prefers to pass a bill by unanimous consent. So if you have an opinion about these issues, it would be wise to contact your state Senate representative now. And if you know someone who is a candidate for an FHA loan this year, you might want to pass this information on to them, as well.