Buying a home with a small down payment (3%)

[Anonymous]

We did an FHA loan too and had a good experience. Paying the PMI "downpayment" at closing was painful and then we pay some PMI every month, but it was the only way to get us into our first house. Now, 5 years later, we are doing great saving and hoping to put down 20% next time around....but it just wasn't feasible for our first home. We also rolled some of our closing costs into our mortgage because we didn't have quite enough saved. This only works if your home will appraise for that much and luckily, ours did.

[Anonymous]

Anonymous wrote:We did this with a FHA loan. Not sure why you want to avoid. In our experience it was good.

Because the mortgage insurance on an FHA loan is usually DOUBLE what it is for a conventional with 5 percent down (so long as you have good credit).

OP, what is your price range? Try for a conventional loan with 5 percent down. It all depends where you live, but there are lenders who will work with you.

Ignore people who say that you shouldn't buy without 20 percent down. It all depends. If you have a stable income, secure job, good credit and little, if any, other debt, then you might save money by buying instead of renting. Just stay within reason. Even if agents try to talk you into a more expensive home, find something where you're monthly payment (including P&I AND taxes AND insurance) is low enough that you'll be able to also save money for repairs (and build a rainy day fund).

Best of luck!

[Anonymous]

Anonymous wrote:An FHA is really your only option, but the person who told you to fear FHA loans was probably saying that based on very out of date advice. Their only major downside is you need to pay PMI but you're going to need to do that with just about any below 20% down loan product still on the market.

If you really have only 15,000, you do need to be realistic about what you can afford, though. For one thing, the max purchase price might not be as high as you think it can be, for two reasons: a) the minimum down is 3.5, not 3. So if you're thinking you can take out a 500,000 loan, it's more like 428,000; and b) you won't be able to afford to pay both closing costs up front and your down payment so you'll need to build the closing costs into the loan amount, which decreases the max purchase price further. For another thing, you need to add in PMI to your estimated monthly payment to see how it really compares to renting.

I would run the numbers for your monthly payment including PMI on a $400,000 place (if you want to spend that much) and see how that number compares to renting a similar place before concluding that you should not save further.

In 2011, I got a conventional loan with 5 percent down and the seller paid 3 percent toward closing. My PMI on that loan was half what it would've been on an FHA loan, and that was before FHA raised their monthly PMI calculation.

OP could shoot for $300k and shop around FHA and conventional options. There are lenders who do conventional loans with 5 percent down. You have to have good credit. A mortgage broker (like First Home) is one avenue.

[Anonymous]

There are also lenders who will do the PMI as an upfront payment, and some will roll it into the loan.

There are options. You should always shop around.

[Anonymous]

I did FHA and it was fine. When the house appreciated (this was early 2000s) - I refinanced and got rid of the PMI.

[Anonymous]

Anonymous wrote:it may be hard to get your offered excepted with an FHA or VA loan because they often require stricter closing rules and apparisals

I've used an FHA loan three times, made three offers, and all three were accepted. They do have some additional appraisal requirements but they're also much safer for the lending institution. I think the fear of them dates to a period when it was unusual to use them so that using them signalled something about the buyer. That view is incredibly outdated (though I suppose the mear fact that some people still have this fear could mean that you stumble on a seller that is skittish about selling to you).

[Anonymous]

FHA PMI now stays for the life of the loan, and it might be not tax deductible. In addition - rates will not stay that low forever, so chances to refi in the future might be slim. That said, OP should really do his math carefully.

[Anonymous]

Anonymous wrote:

Anonymous wrote:An FHA is really your only option, but the person who told you to fear FHA loans was probably saying that based on very out of date advice. Their only major downside is you need to pay PMI but you're going to need to do that with just about any below 20% down loan product still on the market.

If you really have only 15,000, you do need to be realistic about what you can afford, though. For one thing, the max purchase price might not be as high as you think it can be, for two reasons: a) the minimum down is 3.5, not 3. So if you're thinking you can take out a 500,000 loan, it's more like 428,000; and b) you won't be able to afford to pay both closing costs up front and your down payment so you'll need to build the closing costs into the loan amount, which decreases the max purchase price further. For another thing, you need to add in PMI to your estimated monthly payment to see how it really compares to renting.

I would run the numbers for your monthly payment including PMI on a $400,000 place (if you want to spend that much) and see how that number compares to renting a similar place before concluding that you should not save further.

In 2011, I got a conventional loan with 5 percent down and the seller paid 3 percent toward closing. My PMI on that loan was half what it would've been on an FHA loan, and that was before FHA raised their monthly PMI calculation.

OP could shoot for $300k and shop around FHA and conventional options. There are lenders who do conventional loans with 5 percent down. You have to have good credit. A mortgage broker (like First Home) is one avenue.

I agree there are more options at 5%. I was assuming 3.5%, since that's closer to what OP asked about (and I'm assuming OP is after somethign that costs more than $300,000).

[Anonymous]

We were able to put down about $25k for a house downpayment (on a $400ishk house). We had to worry about PMI, and we refinanced 6 months later and because we purchased a foreclosure (it was a failed flip), we were able to get rid of the PMI because the value of the house was much higher. If you are really careful - and lucky - you could make this work.

[Anonymous]

3% seems really low to me. I assume that will wipe out your savings completely, which is always a mistake. Do you think your monthly payments would be significantly lower than your rent?

As mentioned before, there are so many new costs with homeownership--insurance, maintenance, utilities, property taxes, plus the inevitability of a big repair (roof, hot water heater, etc.) that you need a pretty good chunk of savings always available.

[Anonymous]

If you can't build up your savings beyond 15k with your current rent then you need to downgrade your rental and live more modestly while you save up for the down payment. When people refer to eat tuna fish sandwiches for lunch for years and squeezing their family into a small apartment to save up for their downpayment - that's what they're referring to. It's what you're supposed to do - live well below your means, save up, then buy.

I know it's not popular in the DC metro area - people seem to spend the max on rent + eat out for lunch every day - but you just simply won't be able to buy a home with less than 3% down and no money for close costs.

If you want to avoid a FHA loan & the PMI that comes with it, our realtor told us 10% is the required minimum for a normal loan and our credit union can work with us on that. So we're saving up for 10% + 15k for closing costs plus other general savings that may be needed for repairs, furnishing a basement, etc.

Good luck OP!

[Anonymous]

FHA loans now have PMI for the ENTIRE LIFE of the loan as of July 2013 for all loans after this time. We just barely made the cut off.

So yes I would avoid FHA.

[Anonymous]

Anonymous wrote:Buying a place and renting out a room is another option. We rented out a furnished room for about $600 mo for a couple years after buying in DC.

You still have to be able to qualify for the full mortgage on your own. Lenders won't consider the savings from having a roommate unless the place has a second valid certificate of occupancy (lost out on a great 2br in my old apartment building for this reason!).

There are firsttime homebuyer assistance programs in DC. http://dhcd.dc.gov/service/home-purchase-assistance-program is the main one. You might also want to check with Manna and Housing Counseling Services. All of them have income caps.

[Anonymous]

FHA is a great deal. I went with an FHA and have a low interest rate and didnt have to put a lot down.

[Anonymous]

OP, I was in the same position a year ago. My income was decent and stable and my credit was excellent but after working most of my career at low paying non profits combined with high DC rents and grad school loans it was difficult to save enough for a 20% down payment. I worked with a realtor who's great with first time buyers and is familiar with various types of financing as well as the numerous home buyer assistance programs in the region (which I wasn't eligible for). She gave great advice and guidance. There were multiple lenders willing to give me a conventional loan with 5% or less down. I ended up with a 3% down loan with the PMI wrapped in rather than an extra charge and still got a very low interest rate. The biggest hurdle was the unwillingness of sellers to kick in for closing costs in the competitive DC market. It's been a year so I'd have to look up the exact numbers, but I think I needed about $25,000 for down payment and closing costs for a $400,000 house. My budget might be a little tighter than when I was renting, but the extra money is going directly to my housing expenses rather than what I was previously setting aside for my down payment. Like others have mentioned, there are a lot of unpredictable expenses with home ownership, but I am so glad I did it this way.