Finding the Right Mortgage for You
NEW YORK ( MainStreet) Finding the right mortgage for your home can be a tricky proposition, but banks and other lenders are offering various options to meet your needs as the housing market rebounds.
Smaller down payments are still an option if you meet the requirements, depending on the lending institution.
While some Millennials are dealing with student loan debt and lack the cash to opt for a traditional 30-year mortgage requiring a 20% down payment, Federal Housing Administration (FHA) loans remain an option.
FHA loans were the dominant choice among many first time home buyers until recently. With a loan from the FHA, buyers have the option to finance 96.5% of a home's price and put just 3.5% down.
Unlike conventional financing, 100% of the down payment could be a gift, so borrowers are able to secure a loan without putting any of their own money down, said Malcolm Hollensteiner, director of retail lending products and services at TD Bank, a financial institution based in a Cherry Hill, N.J. One advantage is that the underwriting criteria are more flexible than conventional mortgage loans.
While those factors are appealing to many borrowers, the FHA has increased its mortgage insurance costs which makes this type of loan more expensive for the buyer and has led to the number of first time buyers who obtained FHA loans to drop dramatically.
While many home buyers are still seeking the FHA loan, it is not as popular since the monthly mortgage insurance rates have risen, said Sin-Yi Lamberston, real estate and mortgage broker at ERA Yes! in Glendora, Calif. However, FHA loans allow consumers to borrow more with a lower credit score.
If you have less than the 20% down payment, you can obtain private mortgage insurance or PMI to purchase a home.
PMI insurance allows a maximum loan to value of 95% of a home's purchase price, although some PMI loans will insure 97% loan to value for certain lenders, said Hollensteiner.
The draw for borrowers is that it is cheaper compared to an FHA loan. In conventional financing with a low downpayment, buyers will either pay a monthly insurance cost or an upfront mortgage premium; however, with a FHA loan, buyers will pay both.
With recent FHA rule changes, regardless of how much equity a borrower builds in a property, the borrower will have to continue to pay the mortgage insurance premium. With conventional loans, the borrower can cancel mortgage insurance once enough equity is built in the property, but with an FHA loan borrowers will have to refinance into a conventional loan in order to cancel the mortgage insurance, he said.
Consumers can avoid paying PMI by qualifying for piggyback loans or the "80/10/10" loans which only require a 10% down payment. TD Bank offers an 80/10/10 piggyback loan for both conventional and jumbo buyers in which a borrower will put down 10%, take out the first mortgage for 80% and take out a second loan for the remaining 10% of a home's purchase price, said Hollensteiner.