in Minneapolis/St Paul

in Minneapolis/St Paul


You don’t always need a 20% down payment in Minneapolis/St Paul

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It is a general misconception that if you want to buy a high-value property, payments of a minimum of 20% are required, but that simply isn’t true in Minneapolis/St Paul. As property prices rise across the country, what at one time would have been conforming loans are now jumbo loans. A conforming loan is one that meets the limits set by Fannie Mae and Freddie Mac, and generally demand minimum down payment between 3% and 5%. If a conforming loan has an LTV of over 80%, private mortgage insurance is required. Jumbo loans do not need private mortgage insurance, which leads to the mistaken belief that they require 20% minimum down payments.

Jumbo Loans With Less Than 20% Down Payment in Minneapolis/St Paul

Jumbo loans do generally request 20% down payments, and if the buyer can find a 25% down payment they may get a little improvement in the interest rate, but it’s not compulsory. Some buyers may be able to make this down payment, but want to keep the cash in hand for other investments.

In the fall of every year, the Federal Housing Finance Agency looks at the national median home value (i.e. the average cost of a house across the country). This figure is matched against the previous year’s figure. If house prices in Minneapolis/St Paul have risen over the year, the conforming loan limit will rise correspondingly, i.e. should house prices rise by 5%, the conforming loan limit will do the same. The limits for jumbo loans will be adjusted in a similar fashion. A jumbo loan is any loan for more than the amount of the current conforming limit. For 2018 the conforming loan limit is $453,100 in most areas of the country, and $679,650 for areas where property values are particularly high; these are mainly located in California, Colorado, Florida, Virginia, and parts of the North East.

Because lenders are taking a higher risk when giving a jumbo loan, interest rates on a jumbo loan could be higher than those for conforming loans, however the gap is nowhere near what it used to be. Naturally, home buyers will try to find ways that they can purchase more expensive properties without taking on a jumbo mortgage with its associated higher interest rates and down payment requirements. However, if you’re looking at a property which will require a jumbo mortgage and wondering where you will get the money to provide the down payment, it’s worth knowing that you don’t need to make a 20% down payment, you just need to keep your primary mortgage at 80% or less of the purchase price. Clearly, this gives rise to the question of where the other 20% comes from. The secret is in the loan’s structure.

Imagine Minneapolis/St Paul buyers are looking at a $750,000 property, and they only want to make a 10% down payment, rather than the 20% required by a jumbo mortgage. 10% of $750,000 is $75,000, meaning that they will need a mortgage for $675,000. You can’t get private mortgage insurance on jumbo loans, so what are we going to do about the shortfall? Firstly, we can take out a loan for $600,000, i.e., 80% of the purchase price. However, that still means that we are $75,000 down on the required amount, even without taking into account any necessary cash reserves demanded by the lender and closing costs. If we were to make a 20% down payment that would be $150,000. Why would we be permitted to make a lower down payment when we don’t have MPI? It is possible, if we take out two mortgages in what is frequently called a “piggyback” arrangement.

Good To Go Mortgage may be able to provide you with a loan where the purchase price is made up of a 10% down payment, a first mortgage of 80% LTV (so no mortgage insurance required), then a second mortgage of $75,000 for the remaining 10%. This is known as an 80-10-10 loan because 80% of the purchase price is met by the first loan, 10% by the second loan, and 10% five. An alternative is the 80-15-5 loan, the first mortgage for 80% of purchase price, a second mortgage for 15% of purchase price, and a 5% down payment. Want to see the math?

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This type of loan does come with certain stipulations, and you have to think about what the effect on your monthly repayments might be, and what rate and loan terms are best for each of your two mortgages. Rates and terms will influence the amount you pay each month, as well as the total you will pay over the whole loan term. To get this sort of loan you will need a really high-level credit rating, and you certainly won’t be eligible if you had any previous financial problems. This type of loan can only be used for your main residence in Minneapolis/St Paul, not for investment, second homes or vacation homes. However, if you meet the requirements, you can still get that dream home without having to commit your savings or retirement funds to making a down payment.