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Low or No Down Payment
Historically, lenders required a down
payment of 20% to underwrite a loan on a home. As time
went by laws relaxed and in an effort to get more people
into homes the amount of down payment required has in many
instances dropped to 0. A product called Private Mortgage
Insurance was developed. It is required by lenders
on any home loan where the borrower did not have a twenty
percent down payment. This
protects the lender against default for approximately the
first 20% of the loan. This has allowed all types of
new lending packages that allow a buyer to purchase a home
with less down payment required. Once a borrower has
at least 20% equity in their home, they can notify the lender
and request that PMI be dropped.
Other options that would allow a small down payment are:
- A seller financed second mortgage.
- Probably one of the most popular is a lender second mortgage
for up to the 20% needed. This would eliminate the
need for PMI. The second mortgage will usually
have a higher interest rate, but a shorter term.
- Use of a down payment grant. Grants never have
to be repaid and are becoming more popular.
- A gift from a relative. Usually the borrower will still
have to have up to 5% of the down payment themselves. A
gift letter will also be required to prove that the money is
in fact a gift and not a loan.
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