Mortgage Loan Down Payments -- What is the Best Down Payment for Me?

Choosing a Mortgage Down Payment

To decide how much your home mortgage loan down payment should be, you should consider your financial situation (income and savings), the home loan you can get, the cost of your home, and your preferences as far as building equity and the total length of the loan. If you are financially secure (be honest with yourself), you'll probably want to put down 20% of the home's purchase price (or more, if possible). If your current situation doesn't favor a 20% down payment, there are options for getting a mortgage with a lower down payment, albeit with some trade-offs.

Down Payments and Private Mortgage Insurance

Although many lenders require you to make a down payment of 20 percent of the home’s purchase price, some lenders do offer home loans with a down payment of less than 20 percent. If you do get a mortgage with a less than 20% down payment, the lender will usually require you to buy private mortgage insurance, or PMI, to protect the lender by covering some of the cost of your mortgage in case you're unable to make your payments. Statistics show that a borrower with less than 20% invested in a house is more likely to default on a mortgage than someone with 20% or more as a down payment.

The Piggyback Mortgage Loan

One option for putting less than 20% as a down payment is to get a piggyback loan, also known as an "80/10/10" (or other combinations). In this example, the "80" represents the 80% of the home's value that is financed through the primary or "1st" mortgage, the "10" represents your 10% down payment and the 2nd "10" is where the "piggyback" comes in -- it is a 2nd loan that is specifically used to cover a 10% portion of your home's value.

FHA Home Loans

The Federal Housing Authority (or FHA) offers mortgage programs with less than 20% down payment requirements. The FHA has offered mortgages with down payments as low as 3.5% for qualified buyers. Due to the subprime mortgage crisies, the FHA received millions of applications for special mortgages and helped tons of borrowers buy homes, often allowing a low down payment.

How to Get an FHA Home Mortgage Loan

Applying for an FHA loan isn't difficult, and the parameters for those who qualify are fairly straightforward. Start by calling a mortgage broker or an FHA-approved lender. You can search for an FHA lender on the Web site of the U.S. Department of Housing and Urban Development.

For lenders, income is the main factor in determining who qualifies for an FHA loan. The agency's guidelines dictate that that buyers spend no more than 31% of their gross income on mortgage payments. In addition, the interest rates that FHA borrowers get are not actually based on their FICO credit scores (as they would with most standard mortgage loans), but are calculated along the same lines as what any typically approved borrower would receive with a good credit score. The only piece of "fine print" here is that borrowers with a FICO score of 500 or lower will usually have to put 10% down instead of 3.5%.

Mortgage Loan Down Payment Calculator

Here is a helpful mortgage down payment calculator from bankrate.com to help you figure out the ideal down payment based on the home's purchase price, taxes & more:

Down payment calculator

Summary

Visit the Mortgage Loan Zone for more great home finance tips.

references: ftc.gov; money.cnn.com; loan.yahoo.com

Obama's Loan Modification Plan - Mortgage Loan Modification

President Barack Obama's Loan Modification Plan aims to help millions of homeowners avoid foreclosure and regain control of their mortgage loan payments. This plan is meant not only to help individuals with their finances, but also to help the housing industry and eventually the economy as a whole by reducing the drop in home prices via fewer foreclosures and walk-aways.

Main Points of Obama's Loan Modification Program

Focus on Mortgage Payments

Obama's loan modification plan centers on the idea that struggling borrowers will stay in their homes -- even as values drop -- as long as they're able to make their monthly mortgage payments. Billionaire chairman of insurance giant Berkshire Hathaway, Warren Buffett, endorsed this strategy in his most recent letter to BH shareholders: "Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage," Buffett wrote. "Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay."

31% - Thirty-One Percent

The administration's plan requires participating lenders to lower monthly mortgage payments to no higher than 38% of the borrower's gross monthly income. The government would assist by bringing payments down further, to no more than 31% of monthly income. In this plan, the lender would first lower the loan's interest rate to as little as 2%. If the 31 percent threshold is not reached, they would then extend the terms of the loan to up to 40 years. If 31% has still not been reached, the lender would cut the interest to zero.

Cash Incentives for Borrowers & Lenders:

To encourage participation, lenders will get $1,000 for each loan modification made and an additional $1,000 each year for up to 3 years, as long as the borrower continues making payments. Borrowers can get up to $1,000 taken off the principal (or total minus interest) of their loan each year for up to five years -- if they make their payments on time. Neither borrower or lender will receive the cash until the modified loan payments have been made for at least 3 months.

Who Is Eligible for the Loan Modification Program?

Only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents such as the borrower's credit report. In addition, the program is designed to target homeowners who are under such hardship as a loss of income, which puts them at risk of defaulting on their loans. Only loans which originated on or before Jan. 1, 2009, are eligible, and modified payments will be active for five years.

"Net Present Value"

To determine if a mortgage will be modified, the lender will perform what is called a "net present value" test. This test compares the expected income that the loan would generate if it were modified with the expected income it would generate otherwise. If the modified loan is expected to produce more revenue for the lending institution, the lender or servicer is to then go forward with modifying the loan.

Summary

The housing crisis has proven again and again the importance of being realistic -- buying only what you can truly afford -- if not, we have seen the results that surely follow. So, be responsible and help not only yourself, but everyone else.

How do you think the loan modification plan is working so far? Although in theory it would improve the current situation in the housing industry, the plan has received a mixed response. Comment below if you'd like to voice your opinion.

references: US News

Loan Modification: How to Get a Mortgage Loan Modification

What is Loan Modification?

Mortgage loan modification is the renewal of a mortgage at different terms than what the lender (e.g. bank) and borrower (you) agreed to in the original mortgage contract. Basically any loan can be modified if the lender and borrower are in agreement with the new terms. Loan modification has become very popular recently as homeowners struggle to keep up with their monthly mortgage payments and lenders strain to collect all of their due incoming payments.

How Loan Modification Works

The way a mortgage normally works is that the borrower (homeowner) makes payments -- including interest -- until the mortgage is paid in full (or paid off). Typically, until the mortgage is fully paid off, the lender legally holds a lien on the property so that if the borrower sells the property before the mortgage is paid off, the unpaid balance of the home loan must be paid directly to the lender to release this lien. Any change to the terms of the mortgage is considered a modification, but "loan modification" mostly refers to a change in terms based upon either the inability of the borrower to keep up with monthly payments as they're stated in the mortgage contract.

Different Types of Loan Modification

Mortgages can be modified in different ways to help the borrower and make it easier for him or her to make monthly payments on time. Here are some of the things that a loan modification can change:

• Lowering the interest rate
• Changing from an adjustable rate to fixed rate mortgage
• Improving an adjustable rate by changing the way it's computed (lower cost)
• Reducing the loan's principal (total amount due)
• Reducing late fees and other fees or penalties
• Making the term or life of the mortgage longer so that monthly payments are lower
• Fixing the borrower's monthly payment to a certain amount based on income

How to Get a Loan Modification

A homeowner can apply for a loan modification whether he/she is making current monthly payments, is falling behind on payments, has defaulted on the home loan, or is even in foreclosure or bankruptcy. Each case will mean that the terms will be different as far as how the loan can be modified, and will vary by lender.

Mortgage lenders have the motivation to make bank loan modifications and help the borrower because the lender will usually profit more from a loan that is eventually paid in full than a loan that forecloses and forces the property to be sold for less than it's worth. The lender can make a modification at its own discretion if it considers this the best course of action.

The government can create a mortgage loan modification program in which it's voluntary for lenders to participate, but at the same time make incentives for the lender to participate. A mandatory mortgage modification program requires the lender to make loan modifications according to each borrower's situation and loan payment history, as well as details on the property itself.

If you are falling behind on mortgage payments, take advantage of this opportunity and check to see if you are eligible for a loan modification. It can offer peace of mind as you are less stressed and better able to make payments, and can even prevent foreclosure and other problems. Good luck!

reference: wikipedia.org