Low Downpayment Loans

I know I’ve mentioned it before, but it bears repeating: in this market, sometimes you need more cash to rent a house than to buy it. If you’re interested in owning your own home, read on.

Several loan programs allow buyers to purchase a home for less cash than a conventional (bank) loan and sometimes less than first, last and deposit. They include loans from the Veterans Administration (VA), California Veterans Administration (CalVet), United States Department of Agriculture (USDA), Federal Housing Administration (FHA), and some trade association/employment-based loans. Seller financing can also provide flexibility on the down payment.

Sometimes the money you save on the down payment is spent on a higher overall loan amount or a requirement to purchase mortgage insurance, but if you don’t have the cash up front, spreading these additional costs over 30 years could be worth it.

Before I go on, you should know that the law doesn’t permit me to quote specific interest rates without including a complete loan disclosure that would be longer than this column. So, if you’d like details on interest rates, call your realtor and they can provide that information. I can, however, provide information about each of the loans (with the help of my loan expert Pat Williams).

To qualify for a VA loan, you or your spouse must have served in the military (including National Guard), received an honorable discharge, and you must have eligibility left—you can’t already have a new VA loan, for example. Details can be found at www.benefits.va.gov/HOMELOANS/purchaseco_eligibility.asp. If you qualify, you may be able to get a loan up to $417,000.00 with no down payment, and there’s no mortgage insurance requirement.

To qualify for a CalVet loan, you must be a military veteran who wants to purchase a home in California. Details are listed at www.calvet.ca.gov/homeloans/faqs.aspx#pb13. For those who qualify, there’s no mortgage insurance requirement and the interest rates for these loans are typically lower than conventional loans.

To qualify for a USDA Rural Development loan, your family must meet income eligibility requirements. USDA loans were developed to help moderate-income families purchase a home in a rural area (which works for Mendocino County). For USDA purposes “moderate” means a family of four with a maximum income of $74,750.00 that has the ability to afford the mortgage payments, including taxes and insurance, which are typically 29 percent of an applicant’s income. Find more details at http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do.

Many people qualify for FHA loans. There are no maximum income requirements, as there sometimes are with first-time homebuyer programs. However there are limits on how much you can borrow, and you need to have good credit. The great thing about FHA loans is that you only need 3.5 percent of the purchase price for the down payment and that can be in the form of a gift. And all of the closing costs and fees can be included in the loan with seller cooperation.

If you’re part of an organized employment group, check with your leadership or your employer to see if you qualify for any special loans, especially if you’re a teacher, police officer, fire fighter, or state/county employee. Many of these loans have attractive financing and low down payments as a perk of the job.

While I’ve been comparing all these loans to conventional bank loans, you shouldn’t write off the possibility of a conventional loan if you’re willing to purchase mortgage insurance. If you have excellent credit and meet tougher income requirements (you have to make more income per dollar borrowed), conventional lenders will decrease their down payment requirements if you purchase mortgage insurance.

Seller financing requirements are up to the seller, since he or she acts as the lender in the transaction. If you can convince the seller that you can repay the loan without a big down payment, you’ll be able to negotiate a loan that works for you. Typically, with a seller “carry back” (seller acting as the lender), you need to have great credit and/or additional security—like other real estate—to put up as collateral for the loan. If you have someone who loves you a whole lot who will guarantee your loan, that also works well.

As with any real estate transaction, it is always wise to read the contract so you know exactly what the terms are and whether hidden costs are making up for the lack of a big down payment. This is where working with a realtor really pays off. They know what to look for and how to help you negotiate a fair contract.

Next time I’ll write about how to get more square footage at your home, from granny units to garage remodels and more. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

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