“What’s the least amount of cash I need to purchase a home?”
This is a question that comes up a lot in the home buying process. We asked one of our favorite Mortgage Brokers, Patrick Forrestal at Myers Funding for his take on this and here’s a summary of his response.
There are several options available, the most common being FHA loan programs that are sponsored by the federal government. There are also Conventional low down payment loan programs. Lets look at these two.
FHA loans offer the lowest down payment option, just 3.5% of the purchase price of the home and lower interest rates than conventional loans. However, they come at a hefty price, namely Mortgage Insurance. When you buy a house with less than 20% down, you have to pay for Mortgage Insurance (lenders require it for their protection). With FHA loans currently there is 1.75% upfront Mortgage Insurance fee Plus a monthly Mortgage Insurance fee of 1.35%.
Here’s a table comparing the costs of FHA vs. conventional low down payment loans for a $300,000 home purchase:
|Monthly Loan Cost P&I||$1,300||$1,361|
|Minimum Down||3.5% or $10,500||5% or $15,000|
|Upfront Fee||1.75% or $5,066||NA|
|Mortgage Ins Monthly||1.35% or $326/mo||.78% or $185/mo|
|Total Monthly Cost||$1,626/month||$1,546/month|
So, you can see that even though the FHA loan rate is lower, the monthly cost of the Conventional loan is almost $100 less. In addition the FHA loan has the $5,066 upfront Mortgage Insurance fee. Also, the mortgage insurance can never be removed from an FHA loan. With a conventional loan, it can be removed if your home appreciates in value and the ratio of the loan to the value of your home (LTV) equals 80% or less. For instance in this scenario, where you purchased the home for $300,000 and have a loan of $285,000 the home would have to increase in value to about $356,000 to eliminate the mortgage insurance.
Another option we just discovered is a Wells Fargo loan product that has a low down payment with NO Mortgage Insurance. It’s available for home buyers with moderate to low incomes. The income ceiling level varies by location. For more information on that, email us or give a call.