No down payment? Consider a Flex Down mortgage
Ever increasing rent and living expenses can make it challenging to save up the standard down payment of 5% or more.
However, some lenders offer a flex down payment option allowing buyers to secure a mortgage without saving up for a down payment themselves. Did you know that you can use a line of credit, loan, or other unsecured sources of credit to come up with some or all of your down payment? You could even potentially use the equity in an existing home to buy an investment property.
While flex down payment options are a little more rigid than traditional mortgage offerings, they can help buyers get into a home sooner than if they waited to save up a down payment. For some people, that’s a trade-off they’re more than willing to make.
Here’s what prospective buyers need to know about flex down programs:
1. Not every lender offers flex down. Because flex down is not universally available, there will be less available lenders for the purchaser.
2. You’ll need excellent credit and little to no debt. Flex down is a riskier product for lenders so it is only available to income-qualified, employed people with no blemishes on their credit. Lenders will also want assurance that the purchaser is unlikely to default. The ideal client qualifying for flex down would have established credit and at least two trade lines (two sources of funds that are available to them or two sources that can provide a payment history such as a credit card, line of credit, personal loan, car lease or phone/utilities bill). The purchaser should also try to keep the debt-to-income ratio low by not going for the most expensive home in their price range but rather something more appropriate to their current income and debt.
3. You’ll pay more for mortgage insurance. Since flex down is a riskier loan than one with a traditional down payment, mortgage insurance premiums are higher than normal. The insurance premium difference would be 0.2% higher on flex down, so with 5% down, the insurance premium would go from 3.15% to 3.3% as an example. It’s not a huge difference, so the real question is whether the purchaser qualifies for flex down based on credit and debt-to-income ratio.
4. Lenders will factor in the alternate down payment source. Since the purchaser is borrowing money for a down payment, lenders will calculate this into their estimation of the monthly obligations. They will typically use 3% of the outstanding debt as the monthly payment for the debt on the down payment for unsecured loans or a line of credit. For example, if someone used $10,000 of their line of credit or personal loan, the lender will calculate $300 as their monthly repayment in addition to their other debt for the mortgage or any outstanding student loans. If lenders feel that the amount of debt is too high relative to income, they may not approve the loan application.
Please note this is not a zero-down program. You will still need 5% down in order to purchase.
Contact a Mortgage Associate today at MMG Mortgages to help navigate you through the crazy world of credit and mortgage approvals.