If you’re ready to buy your dream home, but don’t have the down payment amount saved up, worry not! There are a few different options for buying a home with low or no down payment that you can take advantage of. Your lender will walk you through the specifics for them, but as a general rule of thumb, you’ll need to have mortgage insurance to help you secure the loan program that works best for you.
What is Mortgage Insurance?
Mortgage insurance is a type of insurance that protects the lender in case you cannot pay back your mortgage. There might be few reasons for this, such as a default on payment, death, or some other situation that prevents you from being able to pay off your mortgage. Typically, mortgage insurance is required when you’re financing using certain loan programs.
How it Works
Typically, mortgage insurance is required for loan programs that have a low or no down payment. Remember, it’s set up to protect the lender and not the borrower, so you’re likely to find it required in loan programs where little or no equity is built in the home up front. There are a couple options for acquiring mortgage insurance. You can get private mortgage insurance in addition to your mortgage loan, or you can roll it into your mortgage and make just one payment. With both options, you may be able to cancel the mortgage insurance after you have a certain amount of equity in your home.
When You Need It
Low Down Payment
If you want to finance your home using a conventional loan, but you have a down payment below 20%, you may be required to have private mortgage insurance. This is separate from the loan and will require a separate payment. The amount of insurance required and the rate will depend on a few factors, like credit score, amount of the loan, and the amount of the down payment. The biggest benefit of private mortgage insurance is that you have the opportunity to cancel once you have 20% equity in your home.
FHA Loans
FHA loan programs always require a form of mortgage insurance. The rate for this mortgage insurance is standardized and paid to the Federal Housing Authority. This type of mortgage insurance includes an upfront fee as well as a monthly premium. Typically, this type of mortgage insurance will last throughout the life of the loan, so the only way to cancel it is to refinance.
USDA Loans
Mortgage insurance for USDA loans are similar to FHA loans, but it typically comes a little cheaper. You’ll still pay the upfront fee and the monthly premium for your mortgage insurance. You do have the opportunity to roll the upfront fee into the loan for both of these programs, but doing so will increase your loan amount and monthly payment.
VA Loans
VA loans have their own form of mortgage insurance, called a VA guarantee. The VA guarantee differs from regular mortgage insurance because it has no monthly premium. Instead, the guarantee is paid as an upfront funding fee. This fee will depend on a few factors, such as your military branch, down payment amount, disability status, and whether or not this is your first VA loan. Like FHA and USDA fees, you can roll this into your loan, but it will increase your loan amount and long-term cost.
Mortgage insurance essentially protects the lender from any risks they may be taking by letting you finance your home through them. For you as a borrower, mortgage insurance will help you find more loan options, particularly if you don’t have a 20% down payment. Ready to explore your options? Contact an experienced lender at Flat Branch Home Loans today!
