Gabe's Blog

Many clients are asking me the question, "So what financing options are still available with less than 20% or 25% as a down payment?"

It is true that many lenders are requiring 20-25% as a minimum down payment on loan amounts above the conventional conforming loan limit of $417K. However, if you are financing between $417K and $729,750 in the bay area, there are still options for you to buy a home with less than 20% down.

First, there is FHA financing up to $729,750 with as little as a 3% down payment. However, on all FHA loans you are required to pay MI (Mortgage Insurance) monthly and an up-front MI premium (at the time of closing your loan) of 1.5% points.

Additionally, there are a few other options available today for financing up to $729,750 with as little as 10% outside of an FHA loan. Here are the tricks:

1. If you finance up to $729,750 with 10% down, you can do (1) loan with Mortgage Insurance (MI). MI has been viewed as an added cost that nobody wanted to pay in the past but it is certainly a viable option today. Given this scenario, MI is about $372 per month.

2. If you are putting 10% as a down payment, we can do 1 loan up to $729,750 without monthly MI. This option is called LPMI (Lender Paid MI). The way this works is that the lender charges an extra 0.625% on top of your interest rate which alleviates the need to pay monthly MI.

Example-

$720K loan at 6.5%= $4550.89 per monthly for principal and interest plus roughly $372 per month for MI. (MI is not tax deductible if your household taxable income is over $110K per year. Please consult your tax advisor for more info.)

$720K loan at 7.125%= $4850.77 (no MI necessary). This is $72.12 less per month even with 0.625% higher interest rate and you have a larger tax deduction than the above if your income is above $110K per year.

3. The last option is to pay a one time MI premium up front and not pay MI monthly. This is called "Life of Loan" MI aka single premium. If you are putting 10% as a down payment with a loan amount up to $729,750 you will pay 1.6% points up front.

Example.....$650k loan x 1.6% = $10,400.00 life of loan single premium.

This premium can be paid for by the seller/builder and you would have your MI paid for for the life of the loan by seller/builder. If the loan is paid off (whether the property is sold or refinanced), the unused portion of MI will be deducted from principal balance owned.

I hope this information helps you understand what financing options are still available today with less than 20% as a down payment. These are definitely uncertain times in the banking and lending industry but rest assured there are still many banks and financial institutions who are making loans and who are committed to staying in the business. As always, if you or anyone you know has any questions regarding financing, please feel free to contact me at 650.492.4071.

Thanks,

Gabe