Short of funds for a down payment and have good credit? Consider an 80/20 Loan.

80/20 loans are not as complicated as people may think. Many lenders will only finance 80% of the home purchase price, which leaves 20% for the borrowers to come up with. While having a down payment is ideal, some borrowers do not have enough of a down payment to cover 20%, and some may not have a down payment at all. In this scenario, a second loan for 20% of the home value can be taken out, as a home equity or piggyback loan. This is the best way to get 100% financing because neither the 80 or the 20 loan will require a down payment, since they are both incomplete loans.

How They Work

The first loan is for 80% of the purchase price. The second loan, for 20% of the purchase price, works as a revolving line of credit for 15 years and then must be paid in full over the course of the last 10 years of the loan term. The first loan prevents the borrowers from having to take out a private mortgage insurance (PMI) policy, which helps them save money. PMI is usually required when any mortgage covers more than 80% of the home value, because it is a risk for the bank. The insurance works to protect the bank, but since the cost is passed on to the borrower, it makes it harder for the borrower to handle.

When a borrower cannot come up with 20% down, an 80/20 loan is usually the best route to go, because it is less expensive than having to carry PMI. The 20% loan will generally carry a higher interest rate than the first trust deed loan, so it is important to carefully manage finances.

Qualifying for an 80/20 Loan

Generally, only those with a good credit standing, a score of at least 700, can qualify for 80/20 loans. Because there is no down payment involved, 100% financing is a very large risk for most lenders, so they will only trust borrowers who have shown they have the ability to pay their debts. In addition to a good credit history, applicants should have a stable employment history, a decent amount of money in savings, a stable history of residency, and a low debt-to-income ratio (DTI). The debt-to-income ratio should be 45% or less if possible. The better the employment, residency and DTI are, the lower the interest rates on the loans will be.

Due to the recent housing industry crisis, these loans are only extended to the most worthy borrowers, and are not offered by all lenders. If you are interested in getting 100% financing through an 80/20 loan, look at your credit report before you begin talking to various lenders to find a program that works for you. Depending on the situation, you may be better off waiting for a few more months to improve your credit and pay down some debt.

Contact me with questions or for a referral to lenders who offer these loans.

How Much Do I Need to Buy A Home?

The good news is that there are lots of folks out there who are very interested in lending you as much as 95% of the purchase price of your home, at very favorable interest rates. Furthermore, they are willing to spread out the payments over a long period of time so that you can afford the house you want. Home loans typically are offered in amounts of 80%, 90% and 95% of the price you are paying for the house. You are expected to pay the remaining amount in cash from your own funds.

The smaller the down payment, the greater the requirements are on a buyer’s financial condition. The reason a lender is willing to lend up to 95% of the value of the house is that history has shown real estate to be such an excellent investment. Lenders expect that the home will be worth more in the future than it is today - so their investment in your home is considered very safe.

That's also why the interest rate you can obtain on a home loan is one of the best around. Consider that America's largest and strongest corporations borrow at what is called the "prime rate," and that today you can borrow a home loan - fixed at the same rate for many years - at substantially less than the prime rate. Lenders have found that home loans tend to be excellent investments, and you benefit every month when you make your loan payment.

What if I don’t have enough for the down payment?

Today's homebuyers have more loan options. A homebuyer may have excellent credit and the ability to make the monthly mortgage payment, but not have the cash for the down payment. For this situation a nontraditional loan program such as an 80-10-10 may be the best loan. Homebuyers should not despair and assume that a home is out of reach. There are many loan options available for many different financial situations.

Questions? We are happy to help! For more information please contact The Clarke Team at 650-489-5399 or sold@clarketeam.com

Breaking News - May 14, 2009 - First Time Homebuyers may get credit for down payment!

First-time homebuyers will soon be able to access their $8,000 federal tax credit when closing on a home through a short-term bridge loan that will cover their down payment on FHA-backed loans.

The Federal Housing Administration will soon publish a policy that will allow FHA-approved lenders, HUD-approved non-profits, and state and local housing finance agencies to "monetize" the tax credit through short-term bridge loans, Secretary of Housing said Tuesday.

This is a great time to be buying a home!!