Recently in the news, you’ve likely heard about rising down payments for mortgages. The QRM rule (qualifying residential mortgage) being debated right now is a risk management issue. The government wants to avoid another mortgage meltdown. So lawmakers are looking at all the factors they say went into the first bubble-burst. One of these factors is risk. So right now, they’re looking at anyone with past credit problems or delinquencies, and requiring them to put 20% cash down on the mortgage. That means on a $150,000 mortgage, a buyer would need $30,000. Think about that…do you have that kind of cash available? Even a home selling for $80,000 would require $16,000 in cash to secure the mortgage. Imagine how long you would have to save-up in order to have this kind of money.
Here’s a look at how one worksheet says it would work out:
- The median home price in 2009 was $172,000.
- A 20% down payment would be $43,025.
- A median salary in 2009 was just under $50,000.
- A “responsible” saver should be able to handle $250 a month.
- That means about 14 years of saving up for a down payment
If you want to do it in less time, it would be about $500-$600 per month. The other option is that the lender (bank) will need to keep 5% interest in that loan. Most banks don’t want to be forced into keeping skin in the game. Many smaller mortgage banks don’t have that kind of capital.
It’s Not Just You
At this point of our country’s economic cycle, a lot of people have some kind of credit problem. This QRM rule means a high percentage of people will need to put a lot more down on their mortgage, or find a lender willing to keep money in the loan to reduce risk. All around, it seems like a difficult situation at best, more likely impossible.
What Can You Do?
As a first time home buyer, you have the option of FHA. That loan program requires 3.5% down. But that still may be a difficult thing for someone who’s renting and just starting out in life, like a first time home buyer. There are still options. In fact, these 100% financing options aren’t just for first time home buyers. You can take advantage of these loan programs even if you’re already in a home, and want to upgrade.
100% Financed Mortgage Loans
- USDA Rural Development Loan – The United States Department of Agriculture backs this loan program. It covers homes outside city limits, hence “RD Loan.” But don’t worry. It doesn’t mean you have to buy a house on the back 40 of a farm way out in the sticks. “Outside city limits” can mean a lot of things when it comes to where you might live. This could put you in a house in a village or small town near a bigger city. Michigan has townships that are similar to villages. RD loans cover many of those areas. So whether you’re looking for a house in the country or someplace just outside the city limits, a USDA Rural Development loan can offer 100% financing.
- VA Loan – VA stands for “Veteran Affairs.” VA Loans are available to military vets. The loan program lines pretty closely to FHA standards. However, they often come with lower closing costs and more liberal loan terms. So instead of 3.5% down payment, VA loans offer zero down most of the time. Sometimes you can even negotiate interest rates. Vets need to get a certificate of eligibility from the Department of Veteran Affairs to provide to a lender when applying for a mortgage.
As the market struggles to improve, the government wants to keep risk down. However, even Democratic Representative Barney Frank says he thinks the 20% down payment is too high. The Federal Housing Administration is also concerned about this move. Acting FHA commissioner Bob Ryan says the requirement will likely keep credit-worthy borrowers from securing low-cost QRM loans.
The Bottom Line
Yes, you can find what amounts to “zero down mortgages” for first time home buyers. You either need to be a veteran, or find a home that qualifies through the USDA Rural Development program.