|Buying with no down payment, monthly PMI
Considering the possibility of buying a home this year? Contrary to popular belief, you need not have a down payment to get your foot in the door.
The following are tips to avoid monthly private mortgage insurance.
Ways to get keys
What you’ll need – a good credit score, at least 700 or better with a clean payment history, consistent income, a solid two-year work history and an ability to afford a mortgage payment.
Conventional loan with
• What it is: In order to buy a house with a conventional loan, you’ll need at least a 5 percent down payment. The 5 percent down payment can come in the form of a gift. No longer do you need to have a minimum down payment contribution.
The entire down payment can be a gift so long as you’re buying a single-family home. Single-pay mortgage insurance is a little-known lending perk that simply allows you to pay a portion of the future years’ PMI payments upfront in one lump sum at closing.
• How it works: Gift money comes from mom, dad or relative and makes up the 5 percent down payment (5 percent of sales price of home). The loan is structured asking the seller of the property to pay the closing costs along with the single-pay mortgage insurance premium due. If you have a strong income that offsets a higher sales price and the house appraises, you’re in. No monthly PMI because it’s paid up front by the seller along with the rest of the closing costs, and down payment fund is gifted.
• What to remember: Closing costs can be usually 2.5 percent of the sales price and average single mortgage insurance is calculated at 1.75 percent of the loan amount. Closing costs plus single pay mortgage insurance equals needed seller concession for sealing the deal.
Family owned home,
• What it is: You buy a property from a family member with a conventional loan, you will still need the 5 percent down payment, but it is a gift of equity, not hard cash. The down payment must be a gift of equity because there is a relationship between buyer and seller.
• How it works: Gift money is provided as a gift of equity from the net proceeds of the sale. In other words, the 5 percent down comes from the net proceeds after paying off any liens against the property. This is also exactly from where the closing costs credit would come, including the single-pay mortgage insurance premium, which is considered to be a closing cost.
• What to remember: In a traditional sale when there is no relationship between buyer and seller, it’s called arm’s length. The seller in such a situation isn’t permitted to gift down payment funds to the buyer, and the buyer must obtain those funds from another donor in hard cash.
However, in the family owned property situation, because there is a relationship between buyer and seller, the transaction is considered to be non-arm’s-length. And as such, the seller can gift the down payment and all closing costs to the buyer (their family member) from the net proceeds of the transaction structured as gift of equity. Such a scenario would also contain no monthly PMI and no cash out of pocket.
Military Veterans also
are eligible for perks
• What it is: If you are a veteran and qualify for the VA guaranteed loan program, this allows you to buy a house without putting in any down payment or needing gift funds. The program also does not contain any monthly PMI, but in most circumstances will contain an upfront funding fee financed in the loan amount (calculated at 2.15 percent of the loan amount). The seller of the property would pay the closing costs for you or the closing costs could be paid as a gift.
• How it works: You make an offer to purchase a home higher than the asking price or whatever asking price you deem fit and ask for a 2.5 percent seller concession for closing costs. The seller of the property in an arm’s-length transaction (remember no relationship between buyer and seller), receives lower net proceeds, money is then given to you reducing your cash to close on the house. Another tip is to ask the lender for a lender credit at closing which also can pay closing fees.
• What to remember: VA loans require a full pest report paid for by the seller of the property. In re-sale properties, this can be somewhat limiting as many sellers don’t want to pay for a pest inspection, let alone any subsequent repairs that could follow suit as deemed necessary for correction when working with a VA home buyer.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.