Can you buy a home with only 1% down? Yes, you can. Is it some wild, exotic toxic loan product with super high interest rates? Actually, no, it’s a conventional, conforming loan. How does it work? Glad you asked.
The minimum down payment for a conforming loan is 3%. However, some of that down payment can be a gift – you don’t need to come up with all of it at once. The gift, as it turns out, can come from the lender.
One of our lenders has launched a program where they will gift the borrower 2% of the purchase price as a down payment; you need come up with only 1% down. Why would they do this? Well, there’s a pretty good profit in a mortgage, so they will still have profit left over, and they get to establish a relationship with a young first-time homebuyer, something that could prove quite valuable to them over the years. Plus, as I’ve been saying for a couple of months, mortgage volume is down, and lenders are hungry.
The loan does require mortgage insurance, or you can do a “no MI” program. No MI programs don’t really mean no mortgage insurance, however. It just means the lender pays the premiums but there’s a slight bump in the interest rate. To understand how that works if you’re interested, read this.
So why would you use this 1% down payment program?
They say real estate is a game of musical chairs, but you have to buy a chair to play. If you believe that housing prices are going to continue rising, getting into the market sooner rather than later will save you money. Because of our hot housing market in Silicon Valley many folks who are saving to buy their first home are finding that the price of real estate is rising faster than their ability to save. Needing only 1% down just might help them get that hand up into their first home.
Is this a good idea?
Opinions will vary on this. The financial crisis of 2008 happened for a reason, and the primary reason was that lenders made it much too easy for anyone to buy a home. When the market turned, it was just as easy (emotionally) for folks who found themselves upside-down to get out – in other words, to walk away from their (relatively small) investment.
On the other hand, no one is suggesting zero-down, stated-income, stated-asset loans to home buyers with sub-prime credit. (Yet) If those products come back it may be time to sell.
This new program, by contrast, requires excellent credit, verifiable income, and you must have at least saved up the 1% down payment, closing costs, and three months of payments. And we’ll verify that you have it, and it’s actually your money. (We need reserves because we don’t want you to be flat broke when you close escrow on your new home; we need you to have a little cushion.)
How much money do you need to qualify at 1% down?
Let’s say you’re looking at a property in the $426,000 range. (In Silicon Valley? Well, this is a theoretical example.) It looks like this:
Purchase Price: $426,000
1% Down Payment: $ 4,260
Closing Costs: $ 2,000 to 7,000
Reserves $ 9,000 to 11,000
Savings needed: $ 15,260 to $22,260
Your situation may vary, and you may or may not qualify. However, if you do qualify then with the 2% gift you only need somewhere between $15,200 and $22,300 in the bank to get into your first home. Without it you would need at least $8,520 more.
How much sooner could you buy your first home?
This program is not for everyone, but if you are saving to buy your first home and have stable employment, some of your own savings, and great credit, and would like to buy sooner rather than later, call me and let’s see if buying with only 1% down is right for you.
This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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