If you have a young family, chances are that you won’t have a 20 percent down payment to put on a house. Without that big pile of money, nonveterans will be going to the Federal Housing Administration for their mortgage, or paying private mortgage insurance on a conventional loan.
Neither is very appealing — the fees are big. FHA fee hikes have made the situation worse.
So let’s look at mortgage options for borrowers without big bank accounts. We’ll also mention some government programs that may help.
People with less than 5 percent to put down, or a weak credit score, probably won’t find a conventional loan. It’s FHA for them.
That’s OK. The FHA was the government’s original subprime lender. Its mission is to get people with small savings and small nicks on their credit into houses.
It will accept down payments as small as 3.5 percent and credit scores as low as 580 (although many lenders in the FHA program will demand higher scores). Unlike conventional loans, FHA borrowers can use gifts, rather than their own savings, to fund the down payment.
Compared to conventional loans, the FHA also will accept borrowers with lower income compared to their debt. If all your monthly debt payments make up more than 43 percent of your income, you’re probably stuck with the FHA, says John Frank, president of Paramount Mortgage in Creve Coeur.
But the FHA isn’t the reasonable deal that it used to be. It’s been jacking up fees.
The agency now charges an upfront fee of 1.75 percent of the loan, which can be financed into the mortgage. On a $150,000 loan, that’s $2,625. Then there’s a 1.3 to 1.35 percent yearly charge on 30-year mortgages. That would add about $169 to the monthly payment.
You’ll be making that payment as long as you have the loan.
With fees at that level, a conventional loan with private mortgage insurance may be a better option.
You can get a conventional loan if you have a good credit score, good income and least 5 percent to put down, although borrowers with a down payment that low may have to shop around to find a willing lender.
Conventional borrowers with less than 20 percent down have to pay for private mortgage insurance. That insurance protects the lender — not the borrower — if the borrower defaults.
It’s not cheap. The price varies with the size of the down payment, and your credit score. You can pay upfront or per-month with the hit added to your mortgage payment.
For instance, borrowers with a high 780 credit score, and a 10 percent down payment, would pay 1.27 percent of the loan amount for insurance if paid upfront, according to Frank. The same borrower with a lowish 660 score would pay 2.64 percent.
Lenders will often roll an upfront insurance payment into the interest rate. It might push the rate on a 4.5 percent mortgage to 4.75 percent, says Frank.
If you opt to pay by the month, you might pay about $90 a month for insurance on a $150,000 loan with a 10 percent down payment.
Monthly payers have an advantage not enjoyed by FHA borrowers. They can dump the insurance once the loan amount declines to 80 percent of the home’s value. That can make the monthly option a good idea for borrowers who are fairly close to having a 20 percent down payment.
All this just adds to the normal confusion of finding a mortgage.
“Have the loan officer run both scenarios,” advises Eric Zegel, who directs mortgage counseling at the nonprofit Beyond Housing organization.
Now for some alternatives:
Veterans can get a Veterans Affairs loan with no down payment or mortgage insurance. Low- and middle-income buyers in rural areas and on St. Louis’ suburban fringe might also ask if U.S. Department of Agriculture home loans with no down payment are available where they are buying. The “guarantee fee” can be rolled into the mortgage amount.
Middle- and lower-income buyers may qualify for down payment help through other government programs. The Missouri Housing Development Commission will back loans of up to 3 percent of the purchase amount for first-time borrowers and veterans. That gets them near the 3.5 percent needed for an FHA mortgage. The loan carries no interest and is forgiven if the family stays put and pays for five years.
In the St. Louis area, a three-person family qualifies with income up to $77,165. The limit is $94,000 in some targeted neighborhoods. For information, call 1-816-759-6600 or go to www.mhdc.com.
St. Louis County’s Hometown Hero program offers up to $7,500 for closing costs and down payments to low- and moderate-income firefighters, police, military and veterans, teachers, nurses and EMTs. The income limit is $75,000 for a three-person household.
St. Charles, Jefferson and St. Louis counties, Florissant and O’Fallon, Mo., also offer no-interest “silent second” loans of $3,000 to $5,000 for homebuyers, depending on the location. There are no payments until the house is sold and in some localities the loan can be forgiven. They are coordinated through St. Louis County and offered through nonprofit housing agencies. For details, call 314-615-2983 or send email to email@example.com.
The housing agencies are Better Family Life, 314-367-1843; Beyond Housing, 314-533-0600; Community Action Agency of St. Louis County, 314-863-0015; Lemay Housing Partnership, 314-631-9905; and the Northeast Community Action Committee 314-359-9849.