Before the housing crisis hit it was considered the American dream to own a home. As the harsh reality set-in during the crisis that many potential homeowners were forced to continue renting as they were not able to come up with the 20% down payment required by lenders for a loan or look elsewhere.
Turning to the Federal Housing Administration for a low down-payment loan was another option as they dominated the market during the housing bust taking on all sorts of risky loans. However, taking on this role depleted the agency’s reserves and has forced it to increase costs.
Good news though has emerged for those that don’t have a lot of cash on hand as some banks are now offering loans with down payments of just 5%. Banks like TD Bank, Bank of America and Wells Fargo are creating some slack allowing homeownership to become an obtainable goal for many again.
So what influenced the change of heart among lenders? There was a market opportunity to be taken advantage of because the FHA has been raising premiums since the reserves ran out. In addition this year the FHA started requiring borrowers to buy private mortgage insurance for the life of the loan.
The substitute programs for FHA loans like TD Bank’s “Right Step” mortgage allows borrowers to secure a loan with a 5% down payment. It also helps them receive as much as 2% of the sale price as a gift from a relative or other third party, so they would only really need 3% down.
The difference can really add up as paying an insurance premium over the life of a FHA $200,000, 30-year fixed rate loan. It can add up to nearly an additional $60,000 over the life of the loan. Homeowners can always refinance to end their FHA loans, but with rates so low it may not be worth it by the time the FHA borrower is able to refinance to a lower rate.
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