How low (Down) can you go?

So you want to buy a home in Alameda?

According to the Zillow Home Index, the median price in Alameda is $699k.  Kearns ($563k), Sabin ($581k) and Buckman ($613k) are not far behind. Fannie Mae loan options are capped to no more than $453,1000, so unless you’ve got a pretty huge down payment, you are probably going to need a “jumbo” loan.

5% down jumbo loans with Guaranteed Rate

Guaranteed Rate offers several 5% down jumbo loan options. We can structure these loans as a single mortgage or as a first mortgage with a “piggyback” second mortgage. And, in some cases, these loans do not require an escrow account for taxes and insurance, further reducing the amount of money due at closing.

A little history

At today’s $453k conforming loan amount, you can put just 3% down. That equates to a $467,000 purchase price. If you want to spend more than that, you either need to put $1 more down for every $1 more that you spend or you need a jumbo loan.

During the mortgage crisis, jumbo financing all but dried up. As jumbo programs came back, most jumbo programs required at least a 20% down payment, with a few outliers permitting as little as 10% down. Less than 10% down meant you had to stick to conforming loan limits.

Don’t forget about closing costs

In addition to the down payment, you also need to budget for closing costs and “prepaids”. Closing costs are the one-time transaction costs you pay in connection with the purchase of your home. They vary, but $4000 is a typical for these costs, consisting of your an appraisal(s), title insurance, settlement costs and recording fees.

Prepaids, by nature, are a bit more variable. They are the first installment of your recurring expenses, including up to a month of interest, a little more than a year of insurance and property taxes (7 months in Washington, 12 month in Oregon).

When doing back-of-the napkin math, I generally assume closing costs and prepaids will add another $8-12k to the money you need to close (maybe even $15k for an Oregon home with property taxes on the high side).

The total cash you need to part with to buy your new home your down payment plus $8k to $15k.

Making a little go a long way

A lower down payment loan makes a little cash go a long way. With 10% down, you need $10,000 of cash for every $100,000 you want to spend. So a $600k home requires $60,000 down. Add in $12k of closing costs and prepaids and you need $72k total cash to buy a $600,000 home

With 5% down, you only need $5000 for every, $100,000 you want to spend. That same $600,000 home only requires $30,000 of down payment. And if you elect to pay taxes and insurance separately from your loan, your closing costs will drop to something like $6000.  

$36,000 to buy a $600k home

To underscore how big a deal this is, let’s figure things backwards: How far will does $36k go with different down payment percentages? 

Take $10k away from your $36k for closing costs and prepaids and we’re left with $26,000 to go to a down payment. With 10% down, your budget would be reduced to a mere $260,000.

Add $26k to a maximum Fannie Mae loan of $453,100 and you get to a price of $479,000.

Better, but still $120k less than your $600k budget on a 5% down jumbo option.

Delayed gratification comes at a cost

Making that leap from the mid-$400s, to the $500’s or $600’s can add years to the time it takes to save up a down payment. Pushing back the date you can buy a home, can come at a significant cost. If prices and interest rates rise while you are saving up, your buying power is eroded.

Maybe you don’t have to sell to buy

If you already own a home and are looking to move, a lower down payment may give you the option to keep your current residence as an investment property. Not having to sell to buy can significantly simplify the logistics of your move. And, in a competitive situation, sellers favor offers with no contingency for the sale of your current residence.

The fine print

As with any loan, you must qualify. A big loan with a small down payment carries more risk for the lender. For these loans, you need to have good credit (700 credit score or higher) and your debt-to-income ratio needs to be no more than 43% to 45%. Unless you are a physician, the maximum loan amount is limited to $650k (which equates to about a $685 max price).

In addition to the money due at closing you must have another 6 months of your new loan payment in savings after closing. Money in a retirement account (IRA or 401k) can be be used to cover the required reserves, so long as we can show you could access it if you have a financial emergency.

And, as with any higher risk loan, you can expect to pay a higher interest rate. However, on the plus side, these loans do not require that you pay mortgage insurance.

Intrigued? Hit us up!

If you’re intrigued, please email (juleef@rate.com) or call (503-799-3711). We’d be happy to share more details and see if you qualify. If so, your house hunt may happen years sooner or you may be able to buy your dream home, rather than a starter home.

*Sample monthly Principal and Interest (P&I) payment of $3,326 is based on a purchase price of $600,000, down payment of 5.00%, 30 year fixed rate mortgage and rate of 5.750%/5.806% APR (annual percentage rate). Advertised rates and APR effective as of 05/23/2018 and are subject to change without notice. Subject to underwriting guidelines and applicant’s credit profile. Sample payment does not include taxes, insurance or assessments. Actual payment obligation will be greater. Not all applicants will be approved. Restrictions apply. Contact Guaranteed Rate for more information and up to date rates.

Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information.

Leave a Reply

Your email address will not be published.