It’s a crucial question for many first-time and moderate-income buyers in rebounding markets across the country: Where do we find the lowest down payment, lowest monthly cost loans? The answers are changing.
True zero-down alternatives are rare and tend to be tightly restricted. If you’re a veteran or active military, a VA-guaranteed home loan might be ideal since it requires no down payment. The same is true for certain rural housing loans administered by the Department of Agriculture, but purchases must be in designated areas outside large population centers. Members of the Navy Federal and NASA federal credit unions can qualify for zero-down financing, but those programs are closed to everybody else. Some state housing-finance agency programs may also be helpful, but they often come with income limits and other requirements.
For most shoppers looking for mini-down payments, there are much larger, less-restrictive sources. The Federal Housing Administration is probably the traditional favorite since it requires just 3.5 percent down. But beware: In the wake of a series of insurance premium increases and a highly controversial move to make premiums non-cancellable for the life of the loan for most new borrowers, FHA no longer rules the low-cost roost.
Fannie Mae, the giant federal mortgage investor, may now do better. And for some applicants, so might Freddie Mac, Fannie’s smaller competitor. Consider this scenario prepared by George Souto, a loan officer with McCue Mortgage in New Britain, Conn., who has long specialized in putting first-time buyers into houses using FHA loans. But lately, said Souto, “the numbers just don’t work as well.” He’s directing clients instead into Fannie Mae’s 3 percent minimum down payment “My Community Mortgage” program.
Here’s the head-to-head: Say you want to buy a $180,000 house but you don’t have much cash for a down payment. If you go with a 3.5 percent FHA loan, you would need to come up with $6,300. If you select Fannie’s 3 percent loan, it’s just $5,400.
The rate on the FHA loan with zero points will be lower – 4.25 percent in Souto’s hypothetical – than 4.625 percent for Fannie. (A point is 1 percent of the loan amount.) But FHA’s new mortgage-insurance-premium charges spoil the rate advantage: $195.41 monthly for FHA versus $123.68 for Fannie’s plan using private mortgage insurance. On a monthly basis, FHA costs $43.30 more – a $1,064.67 payment compared with $1,021.37 – including principal, interest and insurance.