Ardell is beginning a series about styles of starter homes in Seattle. I thought I’d offer a companion post on a few different financing options for that home based on the list price she’s suggesting of $350,000.

Rates quoted in the post are effective as of November 1, 2011 at 2:00 pm.  I’m using 1.25% of the sales price/12 for the property monthly taxes and estimating home owners insurance at $50 a month – a total guestimate on my part.  I’m using a low-mid credit score between 720-739. Adjustable rate mortgages are also available – however in the interest of getting this post up in a timely manner, I’m sticking with 30 year fixed rates with minimum down payment scenarios.

A majority of first time home buyers may lean towards FHA for financing if they’re shy a significant down payment.  FHA currently allows a minimum down payment of 3.5% of the sales price, which can be gifted by a family member. Sellers can contribute up to 6%, however it must go towards closing costs and prepaids – it cannot be applied towards the down payment.  FHA has upfront and annual (paid monthly) mortgage insurance which is slightly reduced if the borrower puts at least 5% down instead of 3.5%.  Another plus about FHA insured loans is that they may be assumable to a future qualified buyer.

FHA 30 Year Fixed at 3.750% (apr 4.581) currently offers rebate pricing which reduces closing cost to approx. $256 with prepaids/reserves being additional.

• Principal & Interest payment = $1579.81 plus mortgage insurance of $323.68 and est. taxes & insurance of $415 = total monthly mortgage payment of $2,318.49
• 3.5% down payment = $12,250 minimum borrower contribution (can be gifted by family member)
• Seller can pay closing cost plus prepaids/reserves estimated at $2940.  Total funds estimated for closing at $15,190.

In my opinion, more sellers should be willing to accept VA buyers – I’m saddened more don’t just on the basis these brave people served our country.  VA loans are not as challenging as they once were.  The Veteran cannot pay for the escrow fee, other than that, unless the seller wants to pay for closing cost (as they may with most any other type of transaction) the cost is minimal or no different for the seller.  VA just reduced the funding fee for these loans – making them more attractive to our Veterans.   Many qualified Veterans opt for to use this program as it offers zero down financing and no annual mortgage insurance and it’s a benefit they’ve earned.

VA 30 Year Fixed at 3.750% (apr 3.898) also has some rebate pricing (not as much as the FHA scenario) with closing cost (not including the buyer’s escrow fee) estimated at $1887 with prepaids/reserves being additional.

• Principal and interest payment = $1643.60 plus taxes and insurance of $415 = total monthly mortgage payment of $2,058.60.
• Zero minimum down payment required.
• Total estimated closing costs and prepaids = $4592 which the seller can pay if negotiated in the purchase and sales agreement.  Total funds for closing estimated at $4592.

Conventional 5% down payment with private mortgage insurance.  Private mortgage insurance has been gaining in popularity for those who can qualify for it. This is mainly due to HUD’s latest increase to FHA’s mortgage insurance premiums.  With a 5% down payment, the seller can pay up to 3% of the closing closing cost.  There are different options with how private mortgage insurance with how it can be paid.

All of the conventional scenarios are with a 5% down payment of $17,500.

30 Year Fixed with Monthly Private Mortgage Insurance: 4.125% (apr 4.777).  Closing cost with the current rebate is approx. $2,930.

• Principal and interest payment = $1641.46 plus mortgage insurance of $249.38 plus taxes and insurance of $415.00 = total monthly mortgage payment of $2275.84
• Total estimated closing cost, reserves and prepaids = $5853 which could be paid for by the seller.  Total funds for closing estimated at $23,353.

30 Year Fixed with Single Premium Mortgage Insurance: 4.125% (apr 4.391).  Single premium mortgage insurance is just that – mortgage insurance that is paid for in one lump sum at closing. With 5% down, I think it’s rather expensive however, if the buyer was able to negotiate the seller paying for closing cost, it would really be worth having it go towards this.  Closing cost with rebate plus the single premium mortgage insurance comes to $10,278.

• Principal and interest payment of $1611.46 plus taxes and insurance of $415.00 = total monthly mortgage payment of $2026.46.  NO monthly mortgage insurance.
• Total estimated closing cost, reserves and prepaids are estimated at $13,201.  The most the seller can contribute is 3% with a 95% loan to value, which is $10,500.  Buyer would need at least $20,201 including down payment assuming the seller contributes the maximum 3%.

Split-premium mortgage insurance is a combo of monthly and single premium and I think a more likely scenario at 5% down than a single premium scenario.

30 Year Fixed 4.125% split-premium mortgage insurance (apr 4.586%).  Closing cost with current rebate pricing and reduced upfront mortgage insurance premium is estimated at $6709.

• Principal and interest payment of $1611.46 plus mortgage insurance of $130.23 and taxes and insurance of $415.00 = total estimated mortgage payment of $2,156.69.
• Total estimated closing cost, prepaids and reserves are estimated at $9,178 which the seller could hypothetically pay for since it’s under the 3% cap.  Total funds for closing are $26,678.

Now if this home was a Fannie Mae Homepath property (meaning the seller is Fannie Mae) it would qualify for the Fannie Mae Homepath mortgage which does not have private mortgage insurance (for credit scores over 660) and there is no appraisal required.  Fannie Mae Homepath will go as low as 3% down payment for owner occupied and 10% down for investment properties – however we’re just talking about buying your first home (primary residence) in this post. 🙂  You do receive preferred pricing at 5% down over 3% so if you can come up with that extra 2%, I highly recommend it! With Fannie Mae Homepath, the seller can contribute up to 6% of the closing cost if negotiated in the purchase and sales agreement.  Fannie Mae often has buyer incentive promotions where they chip in for a majority of the closing cost.

30 Year Fixed Fannie Mae Homepath Mortgage with 5% down payment:  4.875% (apr 4.947%) with closing cost based on factoring current rebate pricing at $2124.

• Principal and interest payment of $1,759.62 plus taxes and insurance of $415 for a total monthly mortgage payment of $2,174.62.
• Total estimated closing costs, prepaids and reserves are estimated at $5,148 which the seller could pay for. Total funds due at closing estimated at $22,648.

USDA loans also offer 100% financing but are not available in Seattle.  If this home was located in more rural areas, such as parts of Redmond or Duvall, it would possibly qualify this type of financing.  Since we’re talking about buying your first home in Seattle, I’ll leave USDA for a future post. 🙂

PS: I know I refer to the seller being able to contribute towards the closing cost on this post several times.  Real estate agents and or builders may contribute as well however, the total contribution amount (seller + agent + builder) cannot exceed the percentages that I’ve referenced.