for buying your home under a combo fixed and adjustable
rate plan
Why
Homeowners Select this Type of Mortgage Loan
•
Quick
Opportunity:
first-time
homeowners select these products when they want
to get into their homes early without waiting
to raise the 20% down
•
Fund
Qualifier:
these
programs help homeowners who don't have the
funds for the required 20% down
and closing costs
•
Prospect
Qualifier:
these
programs benefit all types of homeowners —
those with investments, good credit, moderate
income, etc.
Disadvantages
of this Type Loans
•
Additional
Costs:
many
of these programs will require additional monthly
costs in the form of insurance or higher interest
rates
•
Zero
Equity:
homeowners
will start out with zero equity in their home
No /
Low Down Payment Programs:
Many first-time homeowners struggle to come
up with the required 20% down payment for their
first home.
The average price of a first-home home depending
on your area can range from $120,000 to $135,000.
This requires the first-time home buyer to raise
$20,000 to $27,000 in order to meet the 20%
required down.
In addition, there are closing
costs and other related fees that can
total $5,000 or more (again depending on your
home and area).
Lending institutions and government sponsored
agencies understand the burdens of first-time
home ownership. That is why
they have structured several different programs
to help first-time buyers.
Generally these loans require less than 20%
down payment — and in
some case zero % down — and the
interest rate is typically lower than normal
rates on conventional loans.
Another advantage is that the
income requirements for these programs are less
stringent — both the income and
debt ratios are a little higher when qualifying
for a loan:
loan program targeted
for homebuyers with low and moderate income
levels
requires a down payment
of only 5 percent
you do not need one monthºs
mortgage payment, or cash reserves in
your savings account when you go to closing
provides expanded debt-to-income
ratios — you may use up to 33 percent
of your gross monthly income for housing expenses
each month (instead of the standard 28 percent)
and 38 percent for your total monthly debt expenses
(instead of standard 36 percent)
to qualify for this loan,
the homebuyer must earn no more than the area
median income — there are cost-of-living
adjustments for expensive areas of the country.
check with your lender
for more information about this program
and other programs for qualified borrowers
Fannie 97
fixed-rate mortgage loan with
terms between 15 and 30 years
targeted for homebuyers
who have limited funds for their down
payment and closing costs
requires a down payment
of only 3 percent
provides expanded debt-to-income
ratios — you may use up to 33 percent
of your gross monthly income for housing expenses
each month (instead of the standard 28 percent)
and 38 percent for your total monthly debt expenses
(instead of standard 36 percent)
to qualify for this loan,
the homebuyer must earn no more than the area
median income — there are cost-of-living
adjustments for expensive areas of the country.
check with your lender
for more information about this program
and other programs for qualified borrowers
there are other Fannie
Mae programs for no/low down payment loans:click
here
Freddie
Mac Alt 97:
helps homebuyers with
good credit but limited savings to get
into a home with little down payment.
targeted to borrowers who have worked
hard to establish and maintain a strong credit
history.
there is typically no income
requirements — qualifying ratio
are higher than traditional mortgage products
check with your lender for
more information about this program and
other programs for qualified borrowers
*The
recommended product, term and use are listed as illustrative
purposes on how you might use the equity in your home.
Please note that your circumstances may be different
and that the recommended product, term and use may
not fit your particular need.
Question:
Can I withdraw funds penalty free from my 401(k) plan
to purchase my first home?
Answer:
If you are less than 59 1/2 years of age, you cannot
withdraw funds from your 401(k) plan to purchase your
first home without being subject to a 10 percent additional
tax on early distributions from qualified retirement
plans.
However, depending on the rules for your 401(k), you
may be able to borrow money from your 401(k) to purchase
your first home. Your plan administrator should have
written information about your particular plan that
explains when you can borrow funds from your 401(k)
as well as other plan rules.
Question:
If I can't withdraw funds penalty free from my 401(k)
plan to purchase my first home, can I roll it over
into an IRA and then withdraw that money to use as
my down payment?
Answer:
Yes, if you are receiving a distribution from a 401(k)
that is eligible to roll over into a IRA and you meet
all of the qualifications for an IRA distribution
for a first-time homebuyer. Your plan administrator
is required to notify you before making a distribution
from your 401(k) plan whether that distribution is
eligible to be rolled over into an IRA.
To see if you qualify for a distribution to be used
as a first-time homebuyer, refer to Publication
590, Individual Retirement Arrangements (IRAs)
(Including Roth IRAs and Education IRAs).
Using
Your Personal Investments:
This type of of Pledged-Asset Mortgage product
may not be suitable for first-time buyers. But
we list it anyway for reference.
Referred to as asset-backed
mortgages. Targeted to buyers with sufficient
income who want to pledge their investments as collateral
instead of a making a cash down payment.
Pledged assets may include investments,
CDs, mutual funds, stock portfolios, and investment
property.
Generally, pledged assets are
maintained in a collateral account maintained
by the lender.
Pledged assets can be used for
other family members, such as Zero-Down mortgage
programs explained below.
Pledged assets will remain as investment instruments,
respectively gaining market value for the homeowner.
However in most cases, the homeowner
will not be able to sale or change the investment
strategy without approval by the lender.
Homeowners should calculate
the investment difference between the higher
interest rate charges for pledge-asset mortgages and
the investment potential gain of the pledge asset.
There are disadvantages.
If the homeowner defaults on the mortgage, the lender
gets both the pledged assets and the home.
Using
Family or Other Investment:
Many families want to help young
people get started on home ownership with a
gift that usually goes towards the down payment.
The Zero Down Payment Mortgage
allows the donor to deposit the cash gift into
an interest-bearing account as collateral for the
zero-down payment.
The gift money keeps earning
interest — and it allows the first-time
home buyer to purchase their first home with zero-down.
The zero-down mortgage may vary
from fixed-rate and ARMs.
The Zero-Down Payment Mortgage is restricted in
certain states.
Advantages / Disadvantages:
Zero-downs can help new home buyers get into
their home with help from family or other parties
Donors who donate the funds can earn interest
on the money while the money remains in the home
as the down payment
Major drawback is home owner default, the donor
will lose their investment.
Likewise, investment remains tied in the home
at relatively low rates of return when compared
to other investments.
Gift
Money:
Relatives can help with your down payment by
"gifting" to you some of the money.
However, you will be required
to report this gift when applying for a mortgage
loan.
The standard down payment percentage
is 20% of the home's purchase price.
Many lenders now allow for lesser percentages —
as little as 3-5%, provided that
Private Mortgage Insurance (PMI) is obtained.
PMI is mortgage default insurance
that is required for all conventional mortgage loans
with less than a 20% down payment. It is designed
to pay the lender a portion of the outstanding balance
of a loan in the event of homeowner default.
PMI helps many first-time and
upscale home buyers to purchase a home with
less than 20% down.
Many lenders now offer the piggyback
loan for home buyers who want to avoid PMI
payments.
Piggyback loans is where the
lender stacks a second mortgage loan on top of the
first mortgage loan. The second mortgage is
made at the borrowed amount that brings the down payment
percentage to 20%
The most common piggyback loan
is the 80/10/10:
80% First Mortgage / 10% buyer down / 10% Second Mortgage
Example: the purchase
price of the home is $100,000.
The buyer only has $10,000 for the down payment. The
lender will then underwrite a second loan for $10,000
to bring the required down payment percentage to 20%.
In other words, they have stacked
(or piggybacked) one loan onto another.
The interest rate on the second
mortgage loan is generally higher than the first mortgage.
But unlike PMI, which cost are not tax-deductible,
the interest charges on your second mortgage qualifies
to be deducted from your taxes.
You need to run the numbers to compare
the cost advantage of piggybacks versus PMI. Don't
forget to consider the tax advantage of both products.
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