As prices continue to rise across the real estate market due to the imbalance of supply and demand, concerns about the affordability of housing are increasingly at the fore of any skepticism about the sustainability of this market.
There are two main components to housing affordability: the down payment required to buy a home and the resulting monthly mortgage payment.
While most borrowers focus on the monthly mortgage payment, there is also a big misconception that at least 20% of the purchase price must be saved as a down payment on purchase. Prospective borrowers may be pleasantly surprised to learn that there are various loan programs that allow qualified borrowers to fund up to 100% of the purchase price, reducing (and in some cases eliminating) the initial hurdle for setting aside a large sum gets out of money to buy a home.
The largest pool of products, which provides loans of up to 95% of the purchase price, is provided by state-secured mortgages from Fannie Mae or Freddie Mac. These loans provide qualified borrowers with more traditional loan products with additional mortgage insurance to cover the increased risk for borrowers choosing lower down payments on their home purchases.
In some cases, borrowers earning 80% or less of the median income of the county where they are buying may qualify for mortgage insurance with a decrease of 3% and less. This is in contrast to another federal government-sponsored loan product, the FHA loan, which allows borrowers to qualify for 3.5% of the purchase price. The main difference from this program is that it requires a 1.75% fee for the mortgage insurance premium that can be funded into the loan and that additional mortgage insurance is paid for the life of the loan.
As mentioned earlier, there are some loan products that eliminate the down payment entirely and take 100% of the financing of the home purchase price. One program is the USDA home loan program that has certain restrictions on qualifying. Specifically, USDA loans are only available for real estate in certain rural areas as defined by the USDA (visit the USDA website to search for eligible areas).
Another popular, but often underutilized, program is the VA Home Loan Program for Military Veterans (and others who qualify for a Certificate of Eligibility). This program offers 100% funding opportunities for loans up to $ 1 million.
It is important to understand that all of these programs have certain restrictions and underwriting guidelines in order to qualify. These products are not to be confused with the exotic subprime mortgages that contributed to the 2008 financial crisis. These loans encouraged risky and sometimes predatory loans that resulted in high loan defaults and a subsequent foreclosure crisis. Today, however, federal guidelines and lender scrutiny have contributed to a much more qualified pool of funded transactions with less risk of borrower default.
Because each of these programs have different limitations, it is important to consult a local mortgage expert to evaluate the options that may be available. Some potential qualified buyers may be on the sidelines of this robust real estate market, thinking that they do not have the funds to buy a home, even though the programs discussed above might actually provide a home ownership route.
Peter Crowley is the President of the Re / Max Alliance Group.