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Lenders Now Need a Down Payment.

With the exception of VA and US DA loans, all mortgages today require some sort of down payment. The zero-down loans that were oh-so-popular in the 2000s are history. As part of evaluating the third risk element, lenders want at least a little equity at the starting gate, so zero-down mortgage loans are long gone.

Minimum down payments can be small—as little as 3.5 percent for FHA loans and 5 percent for conventional mortgages—but they're still required. Lenders made the mistake in the past of providing "easy money," and even though it might not take very long to save up $3,500 for a $100,000 home purchase, lenders still like to see it "hurt" just a little bit.

Low-Down Loans Can Be a Trap.

So why doesn't everyone take a low-down loan? For one thing, the interest rates can be higher than those on conventional mortgages with a higher down payment. In fact, they're much higher. A loan with 5 percent down might carry an interest rate of 6.00 percent, but one with 20 percent down could be as much as 1/2 percent lower.

Another reason not to look for a low-down loan is that it can be a risky move unless you're certain that you're never going to sell that house, or at least that you won't be moving for a long while. Why? Because if you ever have to sell the property, you'll have closing costs.

When sellers sell, they typically do so by paying off all associated loan costs with the proceeds of the sale.

For instance, a home is for sale for $500,000 and has a mortgage balance on it of $150,000. The seller bought the home several years ago, and because of regular loan amortization and property appreciation, there's plenty of equity in the deal. Selling costs could be as high as $40,000. At the settlement table:

Sales price $500,000

Payoff $ 150,000

Less closing costs $ 40,000

Net to seller $310,000

Now let's review a home with 5 percent down and someone who has to sell within a couple of years. A buyer buys a house for $400,000 with $20,000 down, for a loan amount of $380,000. The interest rate is 7.50 percent amortized over 30 years. The monthly payment would be $2,657. After a year, the buyer gets a new job in another state and must move, so she sells the house. With natural loan amortization, the loan balance after the first year is $376,496. She sells the home for exactly what she paid for it one year earlier: $400,000. At the settlement table:

Sales price $400,000

Payoff $376,496

Less closing costs $ 30,000

Net to seller ($ 6,4 9 6)

The seller has to either bring a check in the amount of $6,496 to the closing table or wait to sell until the loan balance goes down some more, home prices rise, or a combination of both.

Low-down loans can be a trap. If you have only a small amount of funds available, then this is something you need to look at just to understand your options, or at least the lack thereof. Your lender couldn't care less whether you take a low-down loan or one with a big down payment. It doesn't matter to the lender one way or another as long as your loan is approved by the AUS and the underwriter will sign off on your loan.

 
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