With median home prices well over $860,000 as of early 2019, it is safe to assume most people buying a house in Irvine will need to apply for mortgage financing before getting to the closing table. Conditions in this particular housing market are starting to benefit buyers. According to a recent Zillow report, completed purchase transactions are closer to $800K, which means sellers are willing to make concessions, but this is still quite a bit of money for the average house hunter. Basic real estate math on a purchase transaction worth $800K indicates buyers will need to come up with $160K to close the deal, but this may not always be the case. Here are some important aspects of mortgage lending home buyers should know regarding down payments.
Where the 20 Percent Figure Comes From
In a utopian purchase transaction, down payments wouldn’t even have to be discussed because buyers would have enough cash to cover the final price along with closing fees, thus eliminating the involvement of mortgage lenders. The reality of the American housing market is that banks play a crucial role, and they prefer the idea of 80 percent loan-to-value (LTV) mortgages. Conventional mortgage lending thrives on low-LTV deals because they’re easier to sell to investors and lower the overall risk of default and foreclosure. Banks aren’t the only ones that benefit from low-LTV situations. Borrowers can also expect advantageous interest rates and very low fees.
When Down Payments Are Lower Than 20 Percent
Higher-LTV mortgage loans fall into the non-conventional category and increase lending risk, which means borrowers will be expected to pay more for a loan that will be guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. For the most part, purchase money loans obtained with down payments lower than 20 percent will be subject to mortgage insurance, a condition that can substantially increase the overall cost of the mortgage.
Low Down Payments with FHA Loans
The Federal Housing Administration (FHA) offers mortgage programs with down payments that can be as low as 3.5 percent. FHA loans are in a category of their own, some banks and mortgage brokers don’t offer them, and they require extensive documentation and processing. Not all purchase transactions may qualify for FHA loans. There are lending limits based on the median prices of various housing markets, and there may be restrictions regarding occupancy.
No Down Payments with VA Loans
The Veterans Administration offers a special mortgage loan guarantee program to qualified buyers who may not have to come up with any down payment at all. Instead of putting money down, home buyers must agree to comply with a VA funding fee program that may result in higher monthly mortgage payments for a few years. About 90 percent of VA home loans are issued without any down payments, but there are clear financial benefits for borrowers who can close the deal with a 95 percent LTV.
Twenty percent is the figure most often quoted for a down payment, but alternatives do exist. If you aren’t sure how much you should put down for your home, be sure to find a realtor in Irvine with experience who can help you navigate the details of home financing. Trust the professionals at Irvine Residential Living to assist in your search for your perfect home and to support you during every stage of your home-buying journey. Give us a call today at 714-454-6304.