More homebuyers are avoiding the required 20 percent down payment, without having to pay extra every month for mortgage insurance.
Lenders are providing borrowers the ability to buy a home with as little as 3 percent down. However, interest rates will be higher than comparable loans where the borrower pays 20 percent down. Consumers still come out ahead, though, because they avoid mortgage insurance.
The New York Times recently reported on this trend.
The 20 percent down payment requirement is found within the charters of Fannie Mae and Freddie Mac, the government-backed entities that acquire most U.S. mortgages, up to $417,000 (or $625,500 in higher-cost areas). Home buyers who need to borrow more than 80 percent normally would have to buy insurance to protect Fannie and Freddie, or a third-party must provide the insurance.
The borrower usually pays the insurance, added to the mortgage payment as a monthly premium. The mortgage insurance must be automatically canceled once the mortgage balance reaches 78 percent of the home’s original value. Mortgages issued through the Federal Housing Administration charge insurance for the life of the loan.
Bank of America is offering a new program, in partnership with Freddie Mac and the group Self-Help, that allows down payments as low as 3 percent, without the insurance requirement. There are limits, however, reports the New York Times.
New York area households cannot earn more than $80,700, the area’s median income. And the mortgage amount cannot exceed $417,000. Meanwhile, interest rates are somewhat higher than those of traditional mortgages, but still better than many similar options available.
There are other options, such Social Finance, the lender commonly known as SoFi. Eligible home buyers can put down 10 percent on amounts of up to $3 million — with no mortgage insurance required. But these loans carry higher interest rates as well. So the borrower needs to conduct thorough research on the best low-down-payment option available on every-evolving mortgage market.