Types of Mortgage Loans
Buying a new home before you’ve sold your current home may be out of the question if you can’t come up with the required down payment. Forking over the typical 20 percent down payment can be cost-prohibitive for many home buyers, particularly if you’re already paying a mortgage on your existing home. Lenders require your debt-to-income ratio to be below a certain level and trying to hold two loans at once could push you above the limit.
One big myth is that mortgage lenders always require a 20 percent down payment. Not true. In fact, most conventional mortgage loans do not require you to put 20 percent down. The minimum down payment depends on the lender and loan type. According to Zacks, conventional mortgage lenders now require as little as 5 percent down. But that 5 percent down payment comes with some caveats.
First, the lender will require you to pay private mortgage insurance (PMI) if your loan amount is over 80 percent of the value of the new home you’re buying. This protects the lender if you default on the loan. PMI costs between 0.50% – 1.00% of the loan amount on an annual basis. Once the loan amount is paid down and falls below 80 percent of the property value, you’ll no longer have to pay this. Note that for low down payment loans, a lender will also want to see a healthy credit score, a steady income, a consistent employment history, and a debt-to-income ratio of less than 50 percent.
You could also consider an FHA mortgage loan. The FHA site breaks down the different loan options, each with their own requirements. There are first-time home buyer loans, Gift of Equity loans (a special FHA program for borrowers who have family members helping with the down payment), mobile home loans, investment property loans, and vacation home loans. Even though the typical FHA loans require a minimum 3.5 percent down payment, for second home purchases, it says, “Buyers will typically be required to make at least a 10-20 percent down payment for their home purchases.”
An FHA loan also requires you to obtain mortgage insurance. You will have to pay two mortgage insurance costs in this situation. The first is an upfront mortgage insurance premium of 1.75 percent of the loan balance. The second is the monthly mortgage insurance premium, which is 0.85 percent of the total loan amount on an annualized basis. This is paid until the loan is fully paid off or refinanced, even if the loan balance drops below 80 percent of the home’s value.
A No Down-Payment Option
For many buyers, the conventional low down-payment options, including FHA loans, are unattractive. Many want a less-restrictive alternative with lower fees, less paperwork, and more flexible qualifying requirements. If this applies to you, then buying your next home with no down payment is the way to go.
But how do you buy a new home with no down payment when every lender requires at least some upfront investment? Easy! You bypass the mortgage loan altogether, at least at first. We’ll explain how.
A new option is giving home buyers reason to be optimistic. Today, homeowners can buy a new home without a down payment by paying for the home with cash instead of financing it. I know what you’re thinking, “But I don’t have enough money to make an all-cash offer!” Maybe not, but now at least one company is allowing home buyers to use their cash to make the purchase. Homeward has access to funds that it lets you use to make an all-cash offer on your next home. It’s not a loan and doesn’t incur interest like a typical loan would.
How a No Down-Payment Option Works
With a no down-payment option, you first need to get approved for the Homeward program. You can get approved by answering some questions and submitting some information related to your current home and the home you want to purchase if you’ve found it already. Once approved, you can make an all-cash offer for any home within your approved budget. Because an all-cash offer eliminates the need for the common appraisal, financing and home sale contingencies, you can close on your new home in as little as 10 days. You can also save up to 5 percent on your purchase price by making an all-cash offer. All-cash offers are more attractive to home sellers because there is much less risk the deal will fall through.
You then lease your newly-purchased home from Homeward for up to six months while you take the time to sell your existing property for maximum value. This is a huge benefit for you, giving you the flexibility to move when you’re ready:
- If you want to avoid moving twice, a common annoyance, then you can wait until you’ve secured your new home before selling the one you have.
- If you are trying to reduce the amount of money you pay each month, you can list your current home immediately to sell it as quickly as possible.
- If you want to avoid showings, you can move into your new home as soon as it closes.
- If you want to stay in your existing home while you remodel or repair your new one, you have that option and can avoid the hassle of living through messy renovations.
Once you close on the sale of your existing home, you simply obtain a new mortgage and buy your new home back from Homeward. You can use the proceeds from the sale of your first home to make a down payment on your second home. The leaseback payments cease and the new mortgage payments commence as you are now the proud owner of your new home.
This streamlined system removes the lengthy sales process, saves you money, and eliminates the need for an initial down payment. It’s also much less stressful and uncertain as you are much more in control of each step. It is an attractive option for many home buyers stuck in the familiar predicament of wanting to buy a new home but needing to sell their current one in order to afford it.
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