Ask a Mortgage Broker – This was a great conversation with a local Real Estate Professional where we talk about down payment requirements, zero down payment loans, down payment assistance, closing costs, and how to get your costs paid for by others. Topics Include:
- How to Identify a Professional
- Working with a Mortgage Broker
- Downpayment and Closing Costs
- How Can I Buy A House with Little or No Downpayment?
- What is the Trade Off if I Don’t Put Down 20%?
- Is Zero Down for Real?
How to Identify a Professional
Adrienne Markes is a Realtor in South Orange County, San Clemente area of California. Adrienne put the question out to her social media following to collect questions to “ask a lender”.
Adrienne is a professional that understands the value of educating and empowering consumers. It’s crazy that you should be afraid to talk to a loan officer because they typically come off as pushy and salesy…..You’re not wrong. It’s gross.
Any lender that you hear about on TV, or through an advertisement of any kind, is dumping you into a call center, and you’re connected with someone trying to meet their sales quota for the month.
As a professional independent mortgage expert, sharing what I’ve learned in over 20 years in the business is the best way that I can give back, and try to help consumers avoid the challenges that so many run into when they get tricked into working a call center lender.
The fact that Adrienne is committing her time and energy to educate and empower consumers should go a long way toward earning your trust. She is a true professional in my opinion.
Working with a Mortgage Broker
If you’re a first time home buyer, you may or may not know the difference between a depository bank, credit union, direct lender, and mortgage broker. The short and quick of it is that depository banks, like where you deposit your paycheck, do not specialize in specializing. Depository banks and credit unions typically have pretty tight guidelines for lending.
While many people feel comfortable getting a mortgage from the place where they deposit their pay checks, my professional experience is that their ability to be creative when it’s required is limited. I’m typically ok if the depository bank admits that you don’t meet “their guidelines” and that if you go to a mortgage broker you would qualify. Most loan officers do not have that level of common decency.
Direct lenders suffer from massive overhead and middle management. The way that direct lenders have had to grow their business over the past 10 years has left these organizations with massive overhead, which is passed through directly to consumers in the way of high interest rates and lender fees.
I always feel better if you’re working with a professional, or an expert at the specific situation that you may present, and there are definitely some great loan officers that work at a direct lender. But if you can find that same professionalism or expertise from a mortgage broker, you should always get a second opinion.
Independent Mortgage Brokers tend to be entrepreneurial. We are typically small business owners, and we build our business around a commitment to that kind of high level personal service that only a relationship with a seasoned professional will give you.
Independent mortgage brokers like BuyWise Mortgage have low overhead, no lender fees, access to wholesale interest rates that will often be much lower than if you went to a depository bank, credit union or direct lender.
First Time Homebuyer Questions
In total, this was a one hour interview. We’ve broken it up into four separate videos so that it’s easier to consume, and more relevant to what you want to learn about. This particular segment, we talk about down payment assistance programs, closing cost assistance, and how to get costs paid by others!
More Questions and Answers from First Time Homebuyers:
- Ask a Mortgage Broker 2 – Income Qualifying
- Ask a Mortgage Broker 3 – Credit Qualifying Q&A
- Ask a Mortgage Broker 4 – How Do I Get Pre-Approved?
Downpayment and Closing Costs
Adrienne: Hi. Good morning, everybody. My Name’s Adrienne Marks, and today I wanted to partner with Scott Schang, who is one of my lender friends, and I had this idea a couple of weeks ago, and some of you actually helped me with this.
I posted on Instagram a question to you guys to ask whatever questions you had about getting qualified for a home loan or buying a house, and so after I compiled the questions, I got with Scott, and he graciously agreed to let me interview him to get all of your questions answered.
So Scott, why don’t we get started?
Scott: Absolutely, and thank you so much for having me here. This is so much fun. When you told me what you did, I was just so excited ’cause any opportunity that we have to answer questions, and to help consumers when they’re not face-to-face with a salesperson, and feeling like they’re being pressured, or feel like they’re being told or asked what the salespersons wants them to hear, so this is super, super cool, and I think this is indicative of the type of professional that you are, so it’s an absolute honor, and I appreciate you have on me here, or having me on here.
Yeah, so you want to dive right into it?
How Can I Buy A House with Little or No Downpayment?
Adrienne: Okay. Yeah, let’s go ahead and get started.
Okay, so the first set of questions have to do with down payment and closing costs, and there’s several of them, so the first one is, how can I buy a house with little or no down payment? So that’s what everybody wants to know. Let’s hear what you got.
Scott: Well, this is a really funny question because I’ll tell you, I am shocked at how many people think that they need 20% down payment to buy a home and that’s absolutely not … that’s not at all true. You have, so here in … We’re in southern California, right? You’re southern Orange County. You can use FHA, government-insured financing, with a loan up to $726,000 with 3.5% down payment. So, that’s about what, $25,000 or so on your $700,000 range. That’s crazy.
I rounded down the loan amounts allowed for Conventional, VA and FHA in California.
Loan Limits are as Follows:
High Cost County Limits: $726,525
Standard Conventional Limits: $484,350
These loan limits are for single family homes. For both Conventional and FHA, these loan amounts are higher if you are buying a duplex, 3 or 4 unit property. in California, you can actually buy a 4 unit home for up to $1,397,400 with only 3.5% down payment! VA will only go as high as the single family unit Conventional loan limit for the County you’re buying in.
Conventional, a non-government loan, ’cause people will say, “Oh, I don’t want a government loan necessarily. I just want conventional,” ’cause for whatever reason they think conventional means it’s a better loan. But it’s not, it’s just different. Your minimum down payment up to that same amount is only 5%.
That’s nothing. and if we’re lucky enough to run into a veteran, somebody that served in the military, they can buy up to that $726,000 with zero down payment, no money down at all.
So, yeah, you can absolutely buy a home with little or no down payment. The actual down payment requirements are relatively small in almost all cases. So yes, you can absolutely buy, you can absolutely buy a home with little or no down payment.
What is the Trade Off if I Don’t Put Down 20%?
Adrienne: Yeah. Okay. So I’m going to kind of just, I just thought of something that other people might ask in relation to this.
So what is the trade off if you don’t put 20% down?
Scott: Oh, that’s a good question. So, there are different terms. So every single program is different. Every single loan program is different and essentially all a mortgage loan is is a risk assessment model. So based on your credit and your income and how much money you have, the cost of the loan is determined based on how many risk factors they determine and how many, what they call, compensating factors.
So if you’re putting 20% down, you’re reducing a ton of risk for the lender. You’re going to find that you’re going to have lower interest rates if you have 20% down. Anytime you put less than 20% down, you pay what’s called mortgage insurance and mortgage insurance is one of those things that people are afraid of and they think it’s a bad thing. But I think it’s one of the best tools for buyers that’s out there ever.
It’s essentially, it’s an insurance policy that the buyer pays for every single month. It’s part of your mortgage payment, a couple hundred dollars, and it protects the lender in case you default. Now the great thing about that is for a couple of hundred dollars a month, I can not have to come up with 40 or $50,000 in down payment. So, putting a down payment and hedging that risk is one of the greatest homebuyer tools that exist out there.
So those are kind of the trade offs. You’ll find a little bit better terms and also if your credit isn’t perfect, and you try to get approved with some programs like a conventional program with less than 20% down, there’s a higher probability that you may not get approved if there’s not enough compensating factors.
So then you would shift over into like an FHA, which is much, much more flexible, allows the same loan amounts, but it’s just way more flexible and allows it a lot more people to qualify for that. So there’s always options and you’re going to get sick of me telling you this, but it depends. Yeah. [crosstalk 00:05:57] the answer.
Is Zero Down for Real?
Adrienne: Alright. Perfect.
The next question is a little similar to this and it’s is zero down really real? Can you actually buy a house with zero down? And I think you touched on that a little bit.
Scott: Yes you can. But the question then becomes should you or do you want to? Now, there are obviously programs out there that are designed to be 100% financing like USDA rural development. You’re not going to find that in, in south Orange County necessarily. Actually, I think there is a USDA eligible area up in Trabuco Canyon, a little teeny tiny spot. And then veterans can do a hundred percent financing.
Note: Areas around Trabuco Canyon are USDA Eligible areas. The entire area is not eligible, so you will have to use the USDA Eligibility Lookup Tool to check eligibility for each address in question. This link will tell you if any address in California is USDA Eligible: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do
Other than that, you’re talking about assistance programs and assistance programs, I don’t remember if we get into that really deep, but they’re very expensive. The interest rates are really high. The payments are really high. They typically, in order to do zero down, you’re really not always doing zero down.
You have what’s called a silent second mortgage. So you’ve got liens against your house for the money that the assistance program is giving you. So, while you as the buyer do not necessarily need to come in with a down payment, you’re borrowing the money and not making payments on it. And there’s a significant cost to that.
I would say 99.9% of the time when I show folks numbers side by side with an assistance program and then here’s all the other ways you can get your down payment and closing costs covered, they almost never choose the assistance program because it’s … What I always say is, “If you have no other options, those are amazing programs. But if you have any other options, most people try not to.”
So is it real? Yes. The more important question probably is, is it the right program for you?
Adrienne: Okay, very good point.
And some of what we just discussed led in a little bit to this next question, which is, how can I get down payment assistance?
Scott: Yeah. So, the state of California has the California Housing Finance Agency. I’ve heard a lot of people call it CHFA. I call it CalHFA. It’s calhfa.ca.gov. That’s the official homebuyer program for the state of California. And they have some amazing programs.
Note: You can get more information about the programs that the California Housing Finance Agency offer. CalHFA Website: CalHFA.ca.gov
What it actually is, is you’re borrowing … This is those silent second programs that I was talking to you about. So you’re borrowing the money, it’s a lien, there’s no payments on it. Sometimes there’s an interest rate, sometimes there’s not. And the state of California allows you to stack those programs on top of each other. There was a grant program that was out there for a little while that was discontinued.
That was the NHF Sapphire. And a lot of people know that name. There’s another loan pro … another grant program out there. But again, the way that these things work, they tend to be somewhat complicated.
Like for the grant program, it’s not a lien, but it’s a really high interest rate and you have to keep that high interest rate for a minimum of three years before they forgive the grant. So again, that falls under the category of yes, there are programs, but really just dig into it.
The one thing I would recommend is don’t get caught up in the romantic thought of getting free money because nothing is free and it’s actually very, very expensive and it’s expensive to the point where it will prevent you from … it will put a cap on how much you qualify for.
Because the rates and the payments are so high on it, it puts a cap on how much you qualify for ’cause you’re going to max out your payment. Also, those by your assistance payments don’t have the flexibilities that other programs have. So there are additional restrictions like income and debt to income and things like that that make it a little bit more challenging.
So one of the things, I guess I want to just restate that you mentioned is that if you get this type of assistance, it’s a second loan on the house, you don’t have to make payments on it, but you can’t … in order to get rid of it, you have to actually refinance or sell the house. Is that right?
Scott: Yeah. So it used to be that the only … that if you sold or refinance the home you had to pay off the silent second. They recently changed their rules a couple years ago and now if there’s a significant benefit to the consumer, they will potentially subordinate the second, which means they’ll allow you to do a new first mortgage. Because remember, that’s where they make their money.
They give you the first mortgage at a really high interest rate, and that’s how they’re funding this program. So they don’t want you, they make it really difficult, they don’t want you to pay off that first mortgage at the high rate, and get a lower rate on the first. It is possible, but they, what they … when they came out with the rule, it was after the crash.
So it was when we lost all of that equity and when interest rates went down into the threes and they came out and they said, and they basically said, “Listen, this is going to benefit people, so we’ll subordinate those second liens.” Today, probably not so much ’cause you’re not going to have that huge benefit to the consumer. But yes. So as a rule of thumb, if you sell or refinance your home, you have to pay that off.
And I guess real quick, I hope this isn’t a rabbit hole, but this is one of the conversations I have with buyers, is I tell them, “Listen, you might have 10 or $15,000 in a silent second sitting there and maybe three to five years from now you have some deferred maintenance. Maybe you bought the home, it was a little bit of a project.
You knew you wanted to remodel the kitchen or the landscaping and maybe $10,000 or $15,000 to do that. Well, now if you try to refinance to get that $15,000 out, you have to pay the silent second now. So now you’re borrowing $30,000 and making payments on $30,000, and now you’re making mortgage payments on $15,000 that you weren’t making payments on before.”
So it’s not that that’s a bad thing, but I would consider that a surprise if you didn’t know that going into it and then you tried to take money out and you realized, “Oh, I can’t take money out or else my loan’s going to go way up.” I don’t like those surprises. So those are why those conversations should happen upfront.
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