According to Fannie Mae research, the primary barrier for first-time home buyers is saving money for the down payment and closing costs.
This article will walk-through an example of a borrower who wants to close a loan with 3% down and what happens when a bank says they will only do a mortgage requiring a borrower make a 5% down payment.
How home buyers get into this scenario.
At this point, the borrower has likely taken the right steps by getting a pre-approval and then began looking for a home with their realtor. The buyer then asks the bank if they can purchase home with less than 5% down and without using an FHA loan program.
Unfortunately, this particular bank will not move forward with the borrower’s request of only making a 3% down payment. Now, the borrower has to begin looking for different options. And that’s when our team at NewCastle Home Loans is introduced to the borrower to jump in and help.
How we can work with the home buyer.
First, I will ask the borrower for the goals and expectations while working with a mortgage lender. During our second conversation, the borrower will share a list of requests they would like fulfilled to purchase a single family home or condo as their primary residence:
- Less cash to close on the home
- Lower overall loan costs
- Lower monthly payments
- Equity preservation
- Mortgage insurance cancellation
- Not subject to FHA appraisal and no FHA case number
- No FHA required upfront mortgage insurance
- Lower down payment 3% instead of 3.5% for FHA
- Less than stellar credit score accepted
- Ability to use a cash gift
- No homeownership and education housing counseling required
- No income limits
Wow! This borrower has a big list for us. However, NewCastle Home Loans has a program that meets all 12 items on the list above.
The borrower is a first-time home buyer. Fannie Mae defines a first-time home buyer as:
“An individual is to be considered a first-time home buyer who (1) is purchasing the security property; (2) will reside in the security property as a principal residence; and (3) had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the security property. In addition, an individual who is a displaced homemaker or single parent also will be considered a first-time home buyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period.”
What the borrower needs to qualify.
The borrower makes a good income but falls in the category of having issues with the down payment and ability to pay the closing costs.
After advising the borrower and realtor about a seller credit (allows you to finance the closing costs), the borrower is able to get a $5,000 seller credit, which lowers the cash to close. The seller is happy to do this as they are in a hurry to relocate out of town and need to get the home sold.
The down payment now is only 3% so the borrower is not required to make the 5% down payment. This was another savings to our borrower.
In addition, the borrower avoids the high-cost FHA loan with upfront mortgage insurance and special FHA appraisal. This particular loan program does not have upfront mortgage insurance.
And although the credit score was not stellar, this borrower has a high enough credit score to qualify for this 3% loan program.
So does the customer gets hit with a high interest rate?
Nope. The rate is locked at 4.75% for 30 years.
Is the borrower able to drop the mortgage insurance or does it stick with the loan for 30 years?
With this 3% down payment loan program, the borrower is able to drop the mortgage insurance and does not need to keep it for the life of the loan.
Is there home ownership and education housing counseling required for this loan program?
Can borrower use a gift?
Yes - in this example, the borrower can use a $5,000 gift.
Is there an income cap to qualify for this loan?
No! There is no income discrimination for high wage earners for the 3% down payment program.
NewCastle Home Loans offers a 3% down payment program with these borrower-friendly features. To see if you qualify, see our 3% loan pre-approval application, call us at 855-610-1112 with questions.