|
Private Mortgage
Insurance: No money down homes
have been made possible by allowing the borrower to procure
a mortgage loan that requires private mortgage insurance as
an alternative to the requisite down payment. Typically, the
expected down payment is 20-25 percent of the purchase price
of the home. PMI makes it possible for a person to obtain a
mortgage loan, without paying a dime, by purchasing
insurance that protects the mortgage lender in the event of
the former defaulting on the loan. Of course, the
borrower/aspiring homeowner is required to pay insurance
premium on a regular basis.
Although the premium is tax deductible, people often
preferred piggyback loans to Private Mortgage Insurance
since the amount of insurance premium was generally more
than the interest on piggyback loans. However, today PMI is
the best bet for a person who is keen on buying a house with
no money down.
USDA 100% Financing Program: United States Department
of Agriculture (USDA) has a loan guarantee program that is
better known as Section 502. This program is meant to
provide 100 percent financing to first-time homeowners and
people living in structurally unsound homes to help them
purchase a home in the targeted rural areas. Income
restrictions also apply. The best part about these loans,
for people who qualify, is that the borrowers do not have to
purchase private mortgage insurance even though the loan is
a zero down mortgage. Moreover, the sellers are allowed to
finance up to 6 percent of the purchase price of the
property in lieu of closing costs. The rate of interest on
the zero down mortgage loan is adjustable.
VA Insured Loans: The US Department of Veterans
Affairs (VA) provides eligible veterans the facility of
buying a home with no money down. These loans are known as
VA Insured loans and are meant for all veterans as well as
active military personnel in the Army, the Navy, the Marine
Corps, the Air Force, the Coast Guard and the National
Guard. The best part about these loans is that the mortgage
is a 30 year fixed-rate-level payment obligation. Applicants
with less-than-perfect credit are eligible to avail zero
down mortgages that can be used to purchase single family
homes, approved condominiums and townhouses.
FHA Insured Loans: Although Federal Housing
Administration (FHA) insured loans require 3.5 percent down
payment, the First-time home buyers tax credit of $8000 and
the subsequent legislation, allowing borrowers to monetize
the tax credit and apply it towards their home purchase, has
resulted in borrowers being able to buy a home without
making the necessary down payment. This is because people
financing via state housing finance agencies and non-profits
can be assisted by the latter with the amount of down
payment on an FHA loan, thus providing ample scope for zero
down mortgage loans. While other FHA borrowers can only use
the money to increase the size of their down payment above
the 3.5% minimum or use it towards closing costs. This tax
credit expires on 1st Dec, 2009.
Piggyback Loans: Prior to the sub-prime crisis,
piggyback loans were the most popular means of financing for
a person who was desirous of owning a home without parting
with the requisite amount of down payment. Although, the
popularity of these loans has declined on account of these
loans shouldering much of the blame for the sub-prime
crisis, some mortgage lenders may still be willing to
provide no money down mortgages. So here goes...
As per the guidelines issued by Freddie Mac and Fannie Mae,
people who intend to buy a home by availing a home loan are
required to down pay 25 percent of the purchase price of the
home. The remaining amount can be borrowed from a primary
mortgage lender. However, the borrower can circumvent the 25
percent down payment by obtaining a second mortgage
simultaneously. In other words, the primary mortgage lender
provides a loan for 80 percent of the purchase price and the
second mortgage lender, the remaining 20 percent. Here both
mortgages are secured with the same underlying house as
collateral. The second mortgage piggybacks on the primary
mortgage and carries a much higher rate of interest than the
primary mortgage.
Traditionally, piggyback loans were 80-10-10, 80-15-5 or
75-15-10 loans. The first figure from the left indicates the
percentage of the purchase price funded by the primary
mortgage lender, the second figure is the percentage funded
by the second mortgage lender and the final figure is the
borrower's skin in the game. In time, the final figure was
reduced to zero and resulted in no money down home loans.
Thus, the borrower could easily buy a house with no money
down.
The second mortgage that piggybacked on the primary mortgage
was typically provided by the primary mortgage lender who
gained in terms of higher interest rates, than those charged
on the primary mortgage. In some cases, the second mortgage
was provided by the seller/owner of the house. This brings
us to the concept of seller financing.
Seller Financing: Seller financing often accompanied
piggy backed loans since the second mortgage was either
provided by the seller or by the primary mortgage lender.
Seller financing involves transferring the title to the
house to the buyer in exchange for a note and the right to
foreclose the property in the event of default. The note is
pretty much like a mortgage that is paid off as a balloon
payment within a period of 5 to 10 years. Since it is a
mortgage, the buyer is expected to pay the seller a hefty
interest on the loan. The seller in turn benefits in the
form of a high rate of interest on the loan in addition to a
security interest in the house.
Although 100 percent seller financing is a thing of the
past, it may be possible for an aspiring homeowner to down
pay less than 20 percent and still buy a home if the seller
is desperate to get rid of the house.
In the present scenario, lease contract with option to buy
is the best option for people who are interested in buying a
home with minimum down payment. By paying as little as 1 to
5 percent of the price of the property, the aspiring
homeowner can acquire the right to buy the house at an
agreed upon price at some point of time in future. The
aspiring homeowner (lessee) can then rent the house for a
period of 3 years or so and pay the amount of the rent to
the landlord or the lessor. At the end of this period, the
lessee can buy the home from the lessor at the predetermined
price or may abstain from exercising the option. Considering
the present situation, most sellers are persuading aspiring
homeowners to enter into a lease contract with option to
buy. |
