Before you get a good loan, you must get a good lender. These days they are everywhere. You can go to a single-source lender such as your bank or your credit union. Or a multiple-source lender such as a mortgage broker. The mortgage broker has the advantage because he or she solicits loans from a wide variety of lenders, including banks, insurance companies, and pools of investors. Often a mortgage broker can match you up with just the right lender for your needs. Ask your real estate agent for a mortgage broker recommendation. Also, check with any friends, relatives, or associates who recently bought a home. Chances are they used a mortgage broker and can recommend (or steer you away from!) a mortgage broker. As a last resort they are listed in the yellow pages under Mortgage Brokers. (Note: A mortgage banker may not make loans directly to consumers. Look for a mortgage broker.) Also consider online mortgage brokers. Check a good search engine for them. Also, look into: www.eloan.com www.quicken.com www.lendingtree.com

Just a few years ago the “standard” down payment on a home was 20 percent. That’s $40,000 on a $200,000 property, a lot of money for most people. Today, however, with new financing available from Fannie Mae and Freddie Mac (the “big brothers” of financing who buy most of the loans that lenders and others make on the secondary market), that’s all changed. Today you can easily get financing for 90 percent of your purchase. Depending on your financial situation, you may be able to get 100 percent, sometimes even 103 percent of financing (to help pay for some of your closing costs)! These are called “conforming” loans. (They conform to Fannie Mae and Freddie Mac underwriting standards.) Is there a catch? Of course there is! You have to meet specific guidelines set up by the two giant secondary lenders. Generally speaking these guidelines are as follows:

Maximum loan amount (as of this writing) is $322,700   Must meet strict credit guidelines including a strong FICO score (see below)   Must meet strict income guidelines Where do you get this “miracle” financing? Almost any bank, mortgage broker, or other large lender can handle it for you. (See Article 4 for more details on locating a good lender.)

You do not always need to have great credit or high income to qualify for a conforming loan. Both lenders have special programs that are designed for people with limited income and credit problems. For a few examples (available through lenders, not directly from Freddie Mac or Fannie Mae):   Affordable Gold® 5 from Freddie Mac, is designed for moderate-to low-income borrowers. It only requires a 5-percent down payment and is available on a mortgage with terms of 15, 20, and 30 years.   Freddie Mac’s, Affordable Merit Rate® Mortgage is a mortgage for borrowers who have had some small credit problems. The loan is for a higher interest rate. If the borrower is able to make 24 consecutive on-time payments within a four-year qualifying period, the interest rate is reduced.   Fannie Mae’s Fannie 97® offers a 97-percent mortgage. There are, however, income and geographic area restrictions. And the borrower must participate in face-to-face education programs. And there are other restrictions.

There are other ways to get financing with little to nothing down. VA (Veterans Administration) guaranteed loans, up to around $240,000, are for nothing down. FHA(Federal Housing Administration) insured loans, up to around $210,000 are for just a little bit down. (See the next article for details on these.)

Unless you go with a VA loan, the answer is yes. All FHA loans have it. And all conforming loans where the loan amount is greater than 80 percent require it. In other words, on a $100,000 house, if you put less than 20 percent down, you’re probably stuck with paying mortgage insurance. Mortgage insurance does not protect you. It protects the lender. If you don’t make your payments and the lender has to foreclose on you, the insurance picks up a substantial portion of any loss the lender may incur. That’s why lenders demand it. (That, and the fact that the government requires it!)

PMI (Private Mortgage Insurance) is expensive. Expect to pay an additional 1/2 percent in interest for it. However, once you pay your loan down (or your property appreciates) so that your mortgage is less than 80 percent of the value of your property, you can usually get it removed.

What used to be called “creative financing” is nothing more than having the seller finance your purchase. Instead of going to an institution, such as a bank, to get a mortgage, the seller carries back the “paper,” sometimes for the entire price. However, in order for the seller to do this, he or she must have a substantial equity in the property. Often this is the case with retirees who are downsizing. They want to get a smaller home and often have their existing home paid off, or close to it. While they may need some cash, often they come out of the sale with a lot of extra money, which they then put into the bank or CDs to earn interest. However, if interest rates are low, they are in for a hard time. Until you offer to borrow the money from them as part of the purchase. While the bank may pay 1 to 5 percent, you can easily pay 6 to 10 percent, depending on market conditions. For a seller who is looking for income from cash, you can be a godsend. Often these seller-financed sales are constructed with two mortgages. You go out and get a conventional first mortgage for up to 80 percent of the sales price. (These are relatively easy to obtain.) Then the seller lends you an additional 10 to 20 percent to cover what otherwise would be your down payment.

Pluses of Seller Financing   It’s almost instantaneous no waiting for a lender to fund.   Little qualifying Most sellers only want to see a credit report showing relatively good credit.   High LTVs (Loan to Value) Often a seller will give you the top 5 to 20 percent that would otherwise be your down payment.

Minuses of Seller Financing   Sometimes hard to find a seller with enough equity who doesn’t need to cash out (to buy another property).   Sellers may be wary If you don’t make the payments, they would need to foreclose, and their lack of experience and knowledge makes that difficult.

TRAP LENDER’S RESTRICTIONS Much of the “no money down” nonsense that was popularized in real estate in the 1980s involved having sellers carry back all the down payment. The sellers were placed at a real disadvantage in terms of collateral. Today, with a hot market, few sellers will do this. In addition, institutional lenders may restrict their mortgage amount unless you put down at least some of your own money.

Other Sources for the Down

Payment It would be nice if we could simply write out a check for the down payment, if we can’t get 100-percent financing. However, most of us are always pressed for cash. Other than a flush checking or savings account, here are some sources of cash for a down payment that you may not have considered before.

Alternative Possible Sources of Down Payment   Cash value of life insurance (borrowing on it may be inadvisable check with your financial advisor first)   Refinancing or selling an auto or boat   Sale of other physical assets to generate cash   Sale of stocks, bonds, or other securities (first check with your financial advisor)   Sale of present home   Gifts or loans from relatives or friends   Refinancing investment real estate you already own (should be done before applying for the new loan)   Income tax refund   Letter of credit or credit line from a bank (should be obtained before applying for the loan)   MasterCard, Visa, or other credit card (should be obtained before applying for the loan)   “Sweat equity” offering to fix up a house in return for a reduced down payment   Accumulation of funds from your regular income between date of purchase and close of escrow (insist on a long escrow three months or more)   Personal loan on hobby materials, jewelry or furs, cameras, or other property.

Many of the sources of cash listed involve borrowing. However, many loan programs restrict the borrowing of funds for a down. (Not all some Fannie Mae and Freddie Mac programs specifically allow it.) Be sure to check with what your lender requires. If you do borrow your down payment, it’s a good idea to borrow it at least three months before you enter into a transaction to purchase a home. That way, you’ll have the cash in hand and borrowing will show up as an existing loan against your credit, not new borrowing specifically for the home, which could disqualify you. It’s important to be aware that an extra loan against your credit could decrease the amount you could borrow on a home. (You will be tying up some of your income to pay off that loan. That income won’t be available to help you qualify for a home mortgage.)

Don’t Overlook the Closing

Costs Many buyers simply forget about this very real cost. Don’t. Closing costs are expensive. Typically they are around 5 to 8 percent of the purchase price of the house. If you pay $100,000 for a home, expect to pay about $5000 to $8000 in closing costs. These are cash costs. You’ll need to come up with them in addition to your down payment. (We’ll have more to say about them in Article 16.) They include:

It’s possible to get your closing costs reduced, eliminated, or deferred. One method is to have your mortgage amount increased to cover the closing costs. You are getting a $100,000 mortgage with $5000 in closing costs. This is converted to a $105,000 mortgage with no closing costs. Check with your lender to see if it can be done. Another option is to have the lender roll the closing costs into the loan. You end up with a slightly higher interest rate (around 3/8 percent more), but the lender covers your loan costs. You are getting a $100,000 mortgage with $5000 in closing costs at 6 percent interest. This is converted to a $100,000 mortgage with no closing costs at 6 3/8 percent. Again, check with a lender. Yet another option is to negotiate the closing costs with the seller before you commit to the purchase. Remember, closing costs are negotiable. You and the seller can agree between yourselves who will pay them. As part of the deal, the seller can agree to pay all or part of your closing costs for you.