Tags: mortgage | down | payment | FHA

CNNMoney: Banks Offering Mortgages With Down Payments of Only 5 Percent

Wednesday, 06 Nov 2013 08:22 AM

By Kristin Caliendo

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Banks are making it easier for homebuyers to buy a home with a 5 percent down payment verses higher rates recently.

This is a positive trend for those individuals with tight pockets.

Buyers who couldn't come up with 20 percent or more to put down on their home purchase had to turn to the Federal Housing Administration (FHA) in hopes of securing a low-down-payment loan after the housing market went south.

Editor’s Note:
Obama’s Budget Takes Aim at Retired Americans

Fortunately for buyers, banks are offering loans with a minimal down payment as low as 5 percent and buyers can turn to banks such as TD Bank, Bank of America and Wells Fargo to make their home buying dreams a reality, according to CNNMoney.

For instance, borrower's can secure a loan with a 5 percent down payment through TD Bank's "Right Step" mortgage. In some cases, borrowers would only need to put 3 percent down, as they could receive as much as 2 percent of the sale price as a gift from a third party or relative.

What caused banks to lighten the financial burden of buying a new home? It can certainly be attributed to market opportunity, CNNMoney reported.

When the housing market went belly up, the FHA held the market for low-down-payment loans, which inevitably caused it to increase costs due to exhausting the agency's reserves.

Prospective borrowers who were considering FHA loans started looking at other options, as the FHA not only raised premiums but also made buying private mortgage insurance mandatory for the life of the loan. This requirement, which can be very costly, turned off borrowers.

Rising home prices have allowed banks to re-position themselves and compete with the FHA and potentially offer a better overall package to gain the borrower's business. This increase in home values has allowed private lenders to make their way back on the playing field.

The window of opportunity is opening for individuals who haven't been able to save up the typical 20 percent to put down on a house. "For years, it's been FHA or nothing," Guy Cecala, publisher of Inside Mortgage Finance, told USA Today. "This shift is a sign that mortgage origination is loosening up."

While the FHA was discouraging borrowers, banks were able to make a come back. "As the FHA selectively reduced market share by increasing premiums, we introduced a substitute for FHA loans," said Malcom Hollensteiner, the director of retail lending sales for TD Bank.

There's no escaping the requirement to buy private mortgage insurance whether the borrower is considering an FHA loan or a 5 percent down loan offered through a private lender. The main difference is that borrowers only have to pay private mortgage insurance until they reach 20 percent equity in the home with a non-FHA loan.

A borrower can be paying an additional $60,000 on a 30-year fixed-rate FHA loan with a mortgage rate of 4.4 percent (5.75 percent when you factor in the insurance premium) on a $200,000 loan, CNNMoney noted.

To end their FHA-mandated insurance, homeowners could choose to refinance. But considering how low rates are, by time an FHA borrower is able to refinance to a lower rate it might not be worth the while, CNNMoney explained.

Editor’s Note: Obama’s Budget Takes Aim at Retired Americans

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