Even though many people believe that a mortgage requires a down payment of 20%, it’s just not true. The 20% discount is just what it usually takes to avoid being forced to take out private mortgage insurance (PMI). (For more information, see Private USDA mortgage insurance: avoid it for these 6 reasons )
There is now a way to significantly reduce less than 20% while avoiding paying for the PMI.
3% down and no PMI
A new USDA loan product from Bank of America Corp. allows a borrower to repay as little as 3% of the selling price of a home loan. Plus, you do not have to take out private mortgage insurance, which could save you hundreds of dollars on your monthly payment.
Buyers who have little down payment money often turn to low mortgage mortgages guaranteed by the Federal Housing Administration (FHA), but these require a PMI. (For more, see: HUD Loans vs. FHA: What’s the Difference? ) Avoiding the FHA is the key to avoiding the PMI requirement
. Self-Help then sells to Freddie Mac. If you choose by default, Self-Help absorbs a significant percentage of the loss before Freddie Mac suffers his loss. Indeed, Self-Help Ventures Fund replaces the FHA as the main insurer of the loan.
How to qualify
To get a loan under the new BOA program, you must have a FICO score of at least 660 (FHA requires a minimum of 580) and an income below the median income for your area. You must live in the house as your principal residence, and you must agree to advise the credit in case you already have difficulty making payments. If you are a first-time homebuyer, you will also need to participate in an education program for homebuyers.
Your ultimate rate will depend on your financial situation, but USDA mortgage of America claims that its loans will always be cheaper than the FHA rate.
Food for thought
To help make up for non-mandatory PMI, the new Bank of America loan will require a debt-to-income ratio of no more than 43 percent, according to the Wall Street Journal. This is in addition to the required score of 660 FICOs. The bank says it will also check non-traditional forms of credit, such as monthly expenses and credit history.
A low or no payment loan also means that you will pay more interest for the duration of your loan.
Finally, not to involve the FHA may be good for Bank of America, but what about you? In theory, at least, the FHA’s control over the big banks (and the subsequent fines) gives you USDA mortgage protection as a borrower.