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Looking for Ways to Reduce Your Downpayment?

If you want to buy a $50,000 home, why can’t you borrow $50,000? After all, you have a steady job and good income - you’re “good for it.”

That may be true, but lenders can’t necessarily count on it. Experience tells them that borrowers can lose their jobs, become sick or disabled, even die. This would put the lender in a difficult position if you had borrowed the entire amount of your purchase.

Let’s suppose you “disappeared” and no payments were made on the loan. The lender may have to foreclose and sell the home to the highest bidder to recover the loan - only now the market is down, and the highest bidder only bids $45,000. The lender has just lost money.

If the loan amount had been only $40,000, the lender could have sold for $45,000 and covered the original loan amount and costs related to foreclosure. So, the main purpose of the down payment is to provide the lender with a “cushion.” A second purpose is to give borrowers more of an interest in the property. The more borrowers have invested in a home, the harder they will work to keep the payments current if financial difficulties occur.

Many lenders expect a substantial down payment, 10% is typical - some lenders may ask for more. However, there’s no need to panic. There are ways to get a mortgage with a reduced down payment. This happens when a third party shares the extra risk of lending more than 80% of the property’s purchase price or appraised value, whichever is less. Dollar Bank also offers its own special mortgage programs which enable you to reduce your down payment. It can be the difference between getting a home or waiting until you’ve saved a substantial down payment.

Federal Housing Administration (FHA)

In the 1930s, the federal government realized that down payment requirements were preventing many people from buying a home - especially a first home. They created the Federal Housing Administration (FHA) to help with this problem. FHA does not lend money. It insures lenders against loss on loans when greater than 80% of the purchase price is borrowed.

An FHA-insured loan can be as high as 97%, allowing the borrower to put only 3% down. If the lender must foreclose, FHA pays the difference between the normal loan amount - 80% - and the actual loan amount.

There are costs associated with an FHA loan called Mortgage Insurance Premiums (MIP). They take the form of an initial premium and an annual premium. The initial premium can be added to the loan amount rather than being paid out of pocket. There are maximum loan amounts for FHA insurance - ask a Dollar Bank Mortgage representative for details.

U.S. Department of Veteran’s Affairs (VA)

The U.S. Department of Veteran’s Affairs followed with a similar concept to help qualified veterans, reservists and national guardsmen. They offer a program that can allow the lender to go as high as 100% of the purchase price of a home. The costs associated with a VA guarantee can usually be added to the loan amount instead of being paid upfront. The VA program has a maximum loan limit of $203,000 for no-money-down loans.

Conventional Loan With PMI

When the federal government developed these successful programs, private insurance companies decided that they could do the same for borrowers who do not fit into the FHA or VA programs. They developed Private Mortgage Insurance (PMI) to insure lenders against loss if they lend higher than 80%.

The insurance premiums vary with the risk the PMI company takes - 5% down being the highest risk and also the highest premium - but for many people, this program makes the most sense for getting them into a home sooner rather than later.

If you’re afraid that accumulating the cash for a big down payment could keep you out of the housing market for a while, talk to a Dollar Bank representative. We’ll be happy to tell you about programs that can reduce your down payment and get you into a home sooner. Call 1-800-242-BANK or visit any Dollar Bank office.

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