Buying a Home in Silicon Valley with a Low Down Payment
Financing Options to Buy a Home in Silicon Valley
With an all-time low housing inventory in the Bay Area, multiple offers becoming the norm every time a new house is brought to the market and with housing prices still going up, many squeezed homes buyers wonder whether they still can afford to buy home, especially if they do not have the minimum 20% down payment.
Well, I am happy to report to all potential Silicon Valley home buyers faced with that dilemma that there are multiple alternatives available today as a result of the mortgage guidelines changes which were implemented in December 2014.
As you all remember, in the wake of the 2007 housing crisis lenders tightened requirements from applicants, demanding larger down payments, higher credit scores and private mortgage insurances (aka PMI) to cover the loan in case of default. FHA loans quickly became the preferred option for many home buyers unable to come up with the 20% down payment. For the record, between 2007 and 2009, FHA loan volume surged 355%. So did the fees unfortunately.
Here is what you need to know about the new loan options.
On December 4, 2014, Fannie Mae and Freddie Mac announced new loan programs for well qualified first time home buyers and lower-income home buyers, with down payments as low as 3%.
On 12/13/2014, Fannie Mae launched "My Community Mortgage" program which is available for eligible home owners who wish to refinance their Fannie Mae-owned mortgage but do not qualify under the HARP program. Around the same time, Freddie Mac set up the "Home Possible Advantage" program and opened it to first time home buyers and other qualified borrowers with limited down payment savings. Note that both still require potential home buyers to take out a PMI.
The question is: Should potential home buyers pick a FHA loan or a conventional loan part of the new Fannie Mae / Freddie Mac programs?
A number of personal finance websites (including WalletHub) recently concluded that a home buyer can achieve significant savings on mortgage insurance by choosing a conventional loan over a FHA loan. The reason is simple: FHA mortgage insurance premium nearly doubled since 2008. For a median-priced home in Silicon Valley, borrowers pay up to $17.5K in premium during the first 5 years compared to $9K back in 2008!
By opting for a conventional loan, potential home owners can save around $2K and up to $12K in just 5 years. The higher the down payment (even if it is less than 20%), the lower the premium.
Something that every home owner should also know is that no PMI is required from home buyers once they achieve at least 22% equity in their property. We are talking about potential savings of up to $1.2K/year!
My last tip: there is little to no point in shopping around for lower PMI premium since the 4 largest companies charge almost the same rates per policy.
As a result, I highly encourage potential home buyers to consider these new options available today. Always make sure that you aware of all costs of any loan though and when comparing PMI costs, remember that FHA's upfront cost of the PMI is almost always included into the loan amount.
I am always happy to answer any other questions you may have about these new programs which will most certainly change the financial landscape of homeowners with limited financial means.