You might be surprised to know that you don’t need a down payment of 20% of the sales price. In fact, you may be eligible for a zero down payment loan. Mortgage loans today are fully amortized, which means each monthly payment goes toward to pay down the loan balance and the loan will be paid off at a predetermined date.
Mortgage loans are either considered conventional or government-backed. A conventional loan is one where the lender accepts the risk of issuing a loan while a government-backed mortgage is one where the government compensates the lender for all or part of the loss due to default. Let’s take a look at these two categories.
Most conventional loans today are approved using guidelines established by Fannie Mae and Freddie Mac and make up nearly two-thirds of all mortgage loans approved today. Conventional loans provide a wide range of loan terms ranging from 10 to 30 years in both fixed and adjustable rates.
Conventional loans require a down payment of at least 5.0% of the sales price of the home but will require a private mortgage insurance policy covering the difference between the mortgage balance and the market value of the home. No private mortgage insurance is required when the mortgage is at 80% of the sales price of the home.
Conventional loans can be used to finance a single family home to a 2-4 unit property for either a primary residence, vacation home or investment property.
FHA loans were introduced by the Federal Housing Administration back in 1934 and today are the most popular option for first time buyers seeking to buy and finance a home with as little cash as possible. The minimum down payment required for an FHA loan is 3.5% of the sales price. There are no restrictions such as location, veteran status or monthly income. An FHA loan compensates the lender at 100% of the loss due to default.
The Department of Veterans’ Affairs introduced the VA loan in 1944. This program is available to veterans of the armed forces, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and unremarried surviving spouses of those who died while in service or as a result of a service related injury. VA loans do not require a down payment while also limiting the types of closing costs the veteran is allowed to pay. The guarantee applies to 25% of the loss to the lender in the instance of default, which is rare for VA loans.
The United States Department of Agriculture is another zero down payment option. A USDA loan is designed to finance owner-occupied purchases in rural and semi-rural areas. A home must be located in an approved region to become eligible for a USDA loan. Household must not exceed 115% of the median household income for the area. The guarantee applies to 100% of any loss.
Government loan options include loan terms ranging from 10 to 30 years in both fixed, adjustable and hybrid options. Contact your Majestic loan officer for more details.
Which is the better option of the three? If you’re VA eligible and want the lowest cost mortgage, the VA home loan is usually a good choice. The USDA loan also requires less money down but does have to be located in a specific area. Your Majestic loan officer can help determine if a property you’re interested in qualifies. Finally, if you’re not VA eligible and the property is not in an approved zone, the FHA mortgage is an excellent option.
A fixed rate provides stability over the life of the loan as the interest rate will never change. A fixed rate is easier to budget for each month and is especially helpful regarding long term financial goals. Fixed rates may be slightly higher when compared to an adjustable rate.
An adjustable rate, sometimes referred to as a variable rate, can change throughout the life of the loan based upon a predetermined index, margin and interest rate caps. Most adjustable rate loans today come in the form of a hybrid, where the interest rate is fixed for an initial period before changing into a rate that can adjust once per year.
Another factor that determines a monthly payment is the term of the loan. Terms for home loans can range anywhere from 10 to 40 years primarily in five year increments in 10, 15, 20, 25, 30 and 40 years. Shorter term loans such as a 10 and 15 year term will have higher monthly payments but less interest is paid to the lender over the course of the loan.
Longer terms provide the lowest monthly payment but adds more interest to the loan during the loan term. Longer terms such as 25, 30 or 40 year terms provide payment flexibility and increases buying power due to the lower monthly payments.