One of the most difficult parts of buying a home for Massachusetts first-time homebuyers is saving for the down payment. So how much cash on hand does a homebuyer need to buy a home?
The short answer is that you do not need 20 percent of the purchase price . Massachusetts homebuyers have mortgage loan options that allow for significantly less than a 20 percent down payment, as well as other options that might actually lower the overall cost of borrowing. It's important for first-time homebuyers, as well as repeat buyers, to research mortgage loan information and consult with professionals who will patiently explain your options and provide objective and sound advise.
MassHousing Mortgage – 3 Percent Down
More than 50,000 families and individuals have used a MassHousing Mortgage to buy a home since 1979. MassHousing mortgages have a variety of benefits for first-time homebuyers that are not available with most conventional loan programs. MassHousing Mortgage loans, which have competitive interest rates and fixed-rate terms, allow for up to 97 percent financing, with no cash required on single-family homes and condominiums. In other words, the 3 percent down payment can be a gift from someone else. Rate locks of 30 to 75 days are available, as well as non-traditional credit considerations, such as limited credit history. First-time homebuyers must still meet a lenders underwriting requirements, including minimum credit scores. MassHousing requires a 5 percent down payment for multi-family homes.
One misconception homebuyers and others in the real estate industry have about MassHousing mortgages is that the program is only for low-income borrowers. In fact, the maximum borrower income limit is as high as $126,900 (as of December 27, 2016). The income limit varies by county and sometimes city and town; however, the maximum limit is available in all communities in Essex, Middlesex, Norfolk, Plymouth and Suffolk counties. The income limit in Worcester County is $105,975 and $98,685 in Bristol County. There are also mortgage loan limits based on the type of property a homebuyer purchases. For single-family homes, the maximum loan amount is $424,100 and $543,000 for a two-unit property. A loan of up to $656,350 is available for a three-family home and $815,650 for a four-unit property.
A MassHousing Mortgage loan also features something called "MI Plus," a mortgage insurance that helps a homeowner pay their mortgage, up to $2,000 per month, in case of a job loss for up to six months. There isn't any added cost for MI Plus protection. Mortgage insurance typically is required of borrowers that do not have 20 percent to put down as a down payment. MassHousing mortgage insurance is usually less expensive on a monthly basis, without up-front fees, than other loan programs, such as FHA loans (see below).
In addition, MassHousing provides a low down payment loan that doesn't require the borrower to pay monthly mortgage insurance premiums. Not having to pay monthly mortgage insurance premiums can save home buyers hundreds of dollars every month and thousands over the life of the loan. Borrowers who choose the MassHousing "No MI" loan do not have to be first-time homebuyers. The No MI program will have a slightly higher interest rate than a loan that requires mortgage insurance. If a borrower chooses a mortgage that doesn't require mortgage insurance, MI Plus protection does not apply.
MassHousing borrowers must complete an approved pre-purchase homebuyer education workshop. Also, not every lender is approved to offer MassHousing Mortgages.
Freddie Mac Home Possible Advantage Mortgage – 3 Percent Down
The Home Possible Advantage mortgage only requires a 3 percent down payment and offers a fix-rate, conventional mortgage for first-time homebuyers, as well as other qualified borrowers with limited down payment savings. Homebuyers must meet minimum credit score requirements. The entire 3 percent down payment can come from personal funds, local grant programs or gift funds.
A Home Possible Advantage mortgage can be used to purchase a single-family home, a condominium and for a refinance of an existing mortgage, without any "cash out" at the time of the refinance. Fixed-rate mortgage loans are available in 15-, 20- and 30-year terms. You must use the home as your primary residence, and you may not have any ownership interest in another residential property as of the date of the note, which is the contract between the lender and the borrower.
First-time homebuyers must participate in an approved borrower education program, which your lender can help identify, to qualify for the Home Possible Advantage mortgage. Freddie Mac offers a free online tutorial that meets the education requirements.
The Home Possible Advantage mortgage does not have income limits for homes located in designated low- to moderate-income or under served communities, as defined by Freddie Mac. Freddie Mac provides an online eligibility tool where consumers and lenders can enter a zip code to determine what, if any, income limits may be in place for a particular location.
For example, a search on August 24, 2016, using Freddie Mac's eligibility tool indicated that there was not any income limit for Lawrence, Massachusetts or Boston's East Boston neighborhood; however, Plymouth, Massachusetts and Boston's South End neighborhood both had an income limit of $126,900.
Fannie Mae HomeReady Mortgage – 3 Percent Down
The HomeReady mortgage only requires a 3 percent down payment and offers a fixed-rate, conventional mortgage for first-time homebuyers, as well as other qualified low- to moderate-income borrowers with limited down payment funds. Gift funds can be used as a source of funds for down payment and closing costs, with no minimum contribution required from the borrower’s own funds.
A HomeReady mortgage can be used to purchase a single-family home, a condominium or multi-unit dwelling. Fixed-rate mortgage loans are available in 10-, 15-, 20- and 30-year terms, and there are adjustable-rate mortgage options too. You must use the home as your primary residence, but unlike other loan programs, you may have any interest in another residential property.
Homebuyers must participate in an approved borrower education program, which your Massachusetts lender can help identify, to qualify for the HomeReady mortgage. One option is to participate in the online Framework homeownership education course. The Framework cost is $75.
The HomeReady mortgage does not have income limits for homes located in low-income census tracts. Fannie Mae provides an online eligibility tool where consumers and lenders can enter property addresses to determine what if any, income limits may be in place for a particular address. In Massachusetts, there are 1,478 census tracts, and 33 percent do not have income limits. Non-borrower household income is not counted toward income eligibility limits.
For example, a search on December 1, 2016, using Fannie Mae's eligibility tool appears to indicate that there was not any income limit for most of Boston's East Boston neighborhood; however, in areas outside of the 484 low-income census tracts, the income limit appears to be $94,000 for most of the Greater Boston area. Homebuyers should check income limits for specific addresses.
MHP One Mortgage – 3 percent Down
Massachusetts first-time homebuyers who fall into the low- to moderate-income category will want to consider the "ONE Mortgage" loan program from the Massachusetts Housing Partnership (MHP). The ONE Mortgage offers first-time homebuyers a fixed-rate loan, with a low discounted interest rate, low down payment and mortgage insurance is not required. There are approximately 30 lenders in Massachusetts that participate in the One Mortgage Program.
Homebuyers must put down a minimum of 3 percent of the purchase price when purchasing a single-family property, condominium or two-family house with the ONE Mortgage, and the borrower must occupy the property. Of the 3 percent down payment, 1.5 percent is required to be from the borrower's own savings; however, the remaining amount can be a gift or down payment assistance. For the purchase of a three-family home, the ONE Mortgage Program requires a minimum down payment of 5 percent of the purchase price. The home buyer must have 3 percent of the 5 percent in his or her own savings.
The ONE Mortgage has strict income limits that are based on household income, not just the borrowers income. The income limits vary by county, and, in some cases, communities in that county. For example, a household of three purchasing in Stoneham, MA may have a household income up to $88,290 (income limits as of April 2016). Suffolk County (Boston) has the same income limits. If that same family/household of three has a household income below $70,650, they may be eligible for a subsidy. In some communities in Southern Plymouth County, for example, the income limit for a three-person household is $78,390, and those with incomes less than $59,150 may be eligible for the subsidy. In some counties, such as Middlesex County and Essex County, the income limits vary by city or town within the county.
Borrowers whose total household income is below 80 percent of the area median income might be eligible for a MHP subsidy. Borrowers also must have less than $75,000 in liquid assets, excluding retirement accounts, such as 401K and 403B accounts, to qualify. In addition, homebuyers must agree to use the home purchased as a primary residence through the term of the loan. Similar to MassHousing, an approved pre-purchase homebuyer education class must be completed.
FHA Loan – 3.5 Percent Down
The main benefits of Federal Housing Administration (FHA) loans are the low down payment (3.5 percent) and lenient credit score requirements. You do not have to be a first-time home buyer to obtain a FHA loan, and FHA loans do not have any income limits. In addition, borrowers, if they qualify, may be able to purchase a more expensive house using a FHA loan than allowed with the MassHousing mortgages and Massachusetts Housing Partnership ONE Mortgage Program, both of which have loan limits based on property type.
Borrowers are permitted to purchase single-family homes, condos and multi-family homes with FHA loans. The Federal Housing Administration does not actually lend any money, so homebuyers must use a FHA participating lender. FHA allows the entire down payment to be a gift; however, any reserve funds a lender may require cannot be from a gift.
Although FHA allows for credit scores of 580 or higher for 96.5 percent financing and 500 to 579 for 90 percent financing, most lenders will only provide FHA loans to borrowers with a credit score of 620 or higher in order for the loans to be eligible for sale in the secondary mortgage market.
Homebuyers should be aware that FHA loans are a more expensive option for two important reasons. First, borrowers must pay an "Up Front Mortgage Insurance Premium," which is 1.75 percent of the loan. For example, a $300,000 loan will require an up-front payment, which is usually rolled into the loan amount, of $5,250. Second, FHA loans require an annual insurance premium (1.35 percent of the loan balance) that is collected in monthly installments, and FHA mortgage insurance typically costs more than mortgage insurance for other types of loans. The least attractive feature of the loan is that since June 3, 2013 borrowers must pay the monthly mortgage insurance for the life of the loan, no matter how much equity the buyer obtains. Typically, once an homeowner can show that the mortgage balance is 80 percent or less of the current home value, the borrower no longer has to pay mortgage insurance, but with FHA loans, the mortgage insurance is permanent.
No Money Down Home Loans
The U.S. Veterans Administration helps service members, veterans and eligible surviving spouses become homeowners by providing a home loan guaranty benefit and other housing-related programs to buy, build, repair, retain, or adapt a home for "personal occupancy."
VA Home Loans are provided by private lenders, such as banks and mortgage companies; however, the VA guarantees a portion of the loan, enabling the lender to provide more favorable terms. Veterans often can purchase a home without any down payment and without mortgage insurance.
To be eligible, a borrower must have a good credit score, sufficient income, a valid Certificate of Eligibility (COE), and meet certain service requirements. The length of a borrower's service or service commitment and/or duty status may determine his or her eligibility for specific home loan benefits.
MassHousing offers the Operation Welcome Home mortgage loan, which is an alternative to the VA loan for veterans in Massachusetts. The loan product for eligible Veterans combines a traditional 97 percent loan-to-value first mortgage with a zero-interest second mortgage of up to 3 percent to create a 100 percent financing product that offers essentially the same attributes of a traditional VA loan. For certain property types, such as some condos, MassHousing's product might actually be a better choice for Massachusetts veterans.
The United States Department of Agriculture (USDA) has what are referred to as rural development home loans. USDA loans have income restrictions, and the house must be located in designated rural areas. There are a number of locations in Massachusetts that are in USDA eligible rural areas, including, but not limited to, some locations in Essex County, Middlesex County and Worcester County. USDA rural development loans allow for 100 percent financing, and are available through participating lenders.
There isn't any maximum purchase price, and homebuyers may purchase a variety of property types, include existing homes, new construction, modular homes, planned unit developments (PUD's), eligible condominiums and new manufactured homes with a USDA loan.
Local Housing Organizations
First-time homebuyers will want to check with local housing authorities in the cities and towns that they want to buy a home in to see whether there may be homebuyer down payment assistance and/or grants available to them that qualify to help with a down payment or closing costs. These types of mortgage programs change often, funds are extremely limited and funds often run out before the end of the year, so home buyers will want to obtain information directly from the source of such programs because information online and from other sources might become outdated quickly.
The Massachusetts Department of Housing and Community Development annually awards funds to certain communities and not-for-profit agencies that operate local first-time homebuyer programs. Funds are used to offer down payments and closing costs assistance loans to first-time home buyers that are income eligible. These programs are primarily geared toward low-income borrowers.
Some local banks offer attractive loans to first-time home buyers that plan to purchase in a particular community and adjacent communities.
First-time homebuyers might want to schedule an in-person meeting with a real estate buyer agent who is willing to take the time to explain the home-buying process and various mortgage options available.
There are many reasons to decide to put more money or less money down at closing, and homebuyers should have a conversation with their lender and real estate buyer agent about what factors to consider. There are a lot of options, and the information can be confusing, so homebuyers should take the time to carefully consider their options before rushing into house hunting.
There are loan options in addition to the above that may be a better option for borrowers that have a 20 percent down payment and good credit, so homebuyers should obtain a referral to a competent loan officer that can explain all the programs available.