A consumer's guide to getting your key in the door with as little as five percent down

company! Almost two-thirds of the nation's households own their own

home.

This document describes how families can get into their own homes with

little cash up front. It explains mortgage insurance and how it works,

and looks at the two options -- private mortgage insurance and

government mortgage insurance.

of its many benefits. Along with owning your own home comes a sense of

security and belonging that cannot be found elsewhere. For many,

homeownership represents personal and financial success. There is much

personal satisfaction in living in a home that you own. A home is still

a valued investment which can have many financial advantages and tax

benefits. The amount of interest you pay on a home loan and the real

estate taxes you pay on your home are among the few major federal tax

deductions. Owning a home is the primary way most people build wealth.

Homeownership is also good for our communities, because families who own

their homes are more involved in their local communities and participate

in local events.

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The rewards of homeownership:

     - personal satisfaction

     - sense of community

     - tax savings

     - stability for you and your family

     - investment in the future

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slightly out of reach. For more and more families, saving the money for

a down payment is the biggest obstacle to homeownership. Many people

mistakenly believe that you have to come up with a down payment equal to

20% of the price of a home.

Traditionally, lenders have required that home buyers be able to make a

down payment of at least 20% of a home's purchase price to get a home

loan or mortgage. However, mortgage lenders will grant home loans to

qualifying home buyers with a down payment of as little as 3% of the

purchase price, if the mortgage is insured.

In fact, home loans with down payments of less than 20% are increasingly

popular. They are called "low down payment mortgages."

This is good news for the millions of home buyers who are finding it

difficult to save a large down payment, especially for their first

house.

financial loss if a homeowner stops making mortgage payments. Lenders

usually require insurance on low down payment loans for protection in

the event that the homeowner fails to make his or her payments. When a

homeowner fails to make the mortgage payments, a default occurs and the

home goes into foreclosure. Both the homeowner and the mortgage insurer

lose in a foreclosure. The homeowner loses the house and all of the

money put into it. The mortgage insurer will then have to pay the

lender's claim on the defaulted loan.

For this reason, it is crucial that the family buying the home can

really afford it -- not only at the time it is purchased, - but

throughout the time period of the loan.

Although the cost of the mortgage insurance is paid by the home buyer,

or borrower, the mortgage insurer works directly with the lender.

Mortgage insurance is available to commercial banks, savings & loans and

mortgage bankers, all of whom offer mortgage loans to home buyers.

Remember that mortgage insurance is not the same as credit life

insurance, also called mortgage life insurance. This type of policy

repays an outstanding mortgage balance upon the death of the person who

took out the insurance policy.

requirements of investors in the mortgage market. Because of the losses

that could occur, major investors require mortgage insurance on all

loans made with low down payments.

The three primary investors in home loans are Federal National Mortgage

Association (Fannie Mae), Federal Home Loan Mortgage Corporation

(Freddie Mac) and Government National Mortgage Association (GNMA). By

purchasing and selling residential mortgages, Fannie Mae and Freddie Mac

help keep money available for homes across the country.

Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy the

mortgages. It adds the guarantee of the full faith and credit of the

U.S. Government to mortgage securities issued by private lenders.

The Two Choices: Government Insurance and Private Insurance

Now that we have explained how mortgage insurance works and why it is

necessary, let's look at the basic kinds of mortgage insurance. Low down

payment mortgages can be insured in two ways -- through the government

or through the private sector. Mortgages backed by the government are

insured by the Federal Housing Administration (FHA) or guaranteed by the

Department of Veterans Affairs (VA) or the Farmers Home Administration

(FmHA).

The minimum down payment required by FHA is less than 3%. For

single-family homes, the standard limit for an FHA-insured mortgage

ranges from $67,500 to $151,725 (in certain high-cost areas).

Although anyone can apply for FHA insurance, the other two government

mortgage guarantee programs are much more targeted. The VA program is

limited to qualified, eligible veterans and reservists. This program is

very specialized, so contact your lender for the details. The FmHA

insures loans for the construction and purchase of homes in rural

communities.

Obtaining  conventional financing is the alternative to obtaining a home

loan backed by the government. Conventional mortgages are all home loans

not guaranteed by the government, including those guaranteed by private

mortgage insurers.

Although government and private insurance are based on the same concept

of allowing families to get into homes with less cash down, there are

many differences between the two. Often, the lender or loan originator

will play an important role in suggesting and deciding which insurance

is selected.

Home buyers must make a down payment of at least 3% of a home's value to

be considered for private mortgage insurance. The 3% down payment can come

from a gift from a relative, loan from employer or municipality, or even an advance

on a credit card assuming the borrower qualifies.

Private mortgage insurance is available on a wide variety of home loans

and there is no pre-set limit on the loan amount. Although differences

such as these may affect whether the lender prefers to work with

government or conventional mortgages, your lender will discuss which one

would be better for your situation.

With the wide variety of loans available, home buyers have the freedom

to choose the type of loan that best suits their needs. Early on in the

home buying process, it is a good idea to meet with several lenders to

compare the types of mortgages they offer and shop for the best price

and terms. Best of all, working with a mortgage insurer can be very easy

-- whether your loan is insured by the FHA or a private mortgage

insurance company -- because your lender handles all of the

arrangements.

By making lending money to home buyers safer, mortgage insurance helps

more families get into homes of their own.

regular loan.

To be considered for a low down payment loan, you generally need to

have:

     * sufficient income to support the monthly mortgage payment

     * enough cash to cover the down payment

     * sufficient cash to cover normal closing costs and related

       expenses (explained below)

     * a good credit background that indicates your payment history or

       "willingness to pay"

     * sufficient appraisal value, which shows the house is at least

       equal to the purchase price

     * in some instances, a cash reserve equivalent to two monthly

       mortgage payments

Closing costs, or settlement costs, are paid when the home buyer and the

seller meet to exchange the necessary papers for the house to be legally

transferred. On the average,closing costs run approximately 2% to 3% of the

house price.  This percentage may vary depending on where you live and the

amount of the loan.

Closing costs include the loan origination fee (if not already paid),

points, prepaid homeowner's insurance, appraisal fee, lawyer's fee,

recording fee, title search and insurance, tax adjustments, agent

commissions, mortgage insurance (if you are putting less than 20% down)

and other expenses. Your lender will give you a more exact estimate of

your closing costs.

Points are finance charges that are calculated by the lender at closing.

Each point equals 1% of the loan amount. For example, 2 points on a

$100,000 loan equals $2,000. Lenders may charge 1, 2 or 3 points in

up-front costs in addition to the down payment. The more points you pay,

the lower your interest rate will be. In some cases, you may be able to

finance the points.

much of a mortgage you can reasonably afford. These formulas are called

qualifying ratios because they estimate the amount of money you should

spend on mortgage payments in relation to your income and other

expenses.

It is important to remember that the following ratios may vary from

lender to lender and each application is handled on an individual basis,

so the guidelines are just that -- guidelines. There are many

affordability programs, both government and conventional, that have more

lenient requirements for low- and moderate-income families.

Many of these programs involve financial counseling for low- and

moderate-income people interested in buying a home and in return, offer

more lenient requirements.

Generally speaking, to qualify for conventional loans, housing expenses

should not exceed 26% to 28% of your gross monthly income. For FHA

loans, the ratio is 29% of gross monthly income. Monthly housing costs

include the mortgage principal, interest, taxes and insurance, often

abbreviated PITI. For example, if your annual income is $30,000, your

gross monthly income is $2,500, times 28% = $700. So you would probably

qualify for a conventional home loan that requires monthly payments of

$700.

Any expenses that extend 11 months or more into the future are termed

long-term debt, such as a car loan. Total monthly costs, including PITI

and all other long-term debt, should equal no greater than 33% to 36% of

your gross monthly income for conventional loans. Using the same

example, $2,500 x 36% = $900. So the total of your monthly housing

expenses plus any long-term debts each month cannot exceed $900. For FHA

the ratio is 41%.

     Maximum allowable monthly housing expense

     26% - 28% of gross monthly income - Conventional

     29% of gross monthly income - FHA

     Maximum allowable monthly housing expense and long-term debt

     33% - 36% of gross monthly income - Conventional

     41% of gross monthly income - FHA

One way to determine how much to spend for housing is to compare your

monthly income with monthly long-term obligations and expenses. Use the

worksheet, "Evaluating Your Financial Resources," to determine how much

money you can spend on housing. Be sure to only include income you can

definitely count on.

When budgeting to buy a home, it is important to allow enough money for

additional expenses such as maintenance and insurance costs. If you are

purchasing an existing home, gather information such as utility cost

averages and maintenance costs from previous owners or tenants to help

you better prepare for homeownership.

Homeowner's insurance or property insurance is another cost you will

have to consider. The lending institution holding the mortgage will

require insurance in an amount sufficient to cover the loan. However, to

protect the full value of your investment, you might want to consider

purchasing insurance that provides the full replacement cost if the home

is destroyed. Some insurance only provides a fixed dollar amount which

may be insufficient to rebuild a badly damaged house.

low down payment loan. In addition, low down payment loans may be used

with the wide variety of mortgages.

Besides price range, there are many other factors to consider when

purchasing a home. It's in your best interest to take care in selecting

a home that will have lasting value as well as provide shelter. Be sure

the neighborhood and house meet the needs of your family. If you have

children, you may want to know if there are other children in the

neighborhood and what schools or playgrounds are nearby. Also consider

the availability of public transportation and how far family members

will have to commute to work or school.

Check on the condition of the plumbing, heating and electrical systems

and whether they are up to code regulations. The best and easiest way to

do this is through a certified home inspection, from a certified

inspector.

If you are like most people, a home is the single largest purchase you

will ever make. It is important that you select a home that will meet

your family's needs and keep you happy for years to come. And most

important, you must be able to afford to remain in that home for as long

as you please.

where the prospective home buyer and the lender meet to discuss the

potential loan. You will need to bring information to verify your income

and long-term debts.

Often people prefer to meet with the lender before house hunting to

determine in advance what price range they can realistically afford and

the mortgage amount for which they can qualify. This step is called

pre-qualification and can save you much time and trouble by making

certain you are looking in the correct price range.

For your first meeting with the lender, you should bring:

     - A purchase contract for the house (if you have one)

     - Your bank account numbers and the address of your bank branch,

       along with checking and savings account statements for the

       previous 2-3 months

     - Pay stubs, W2 withholding forms, tax returns for two years, or

       other proof of employment and income verification

     - Divorce settlement papers, if applicable

     - Credit card bills for the past few billing periods, or canceled

       checks for rent or utility bill payments, to show payment history

       and amount of revolving debt

     - Information on other consumer debt such as car loans, furniture

       loans, student loans and retail/credit cards

     - Last 2 years business tax returns and year to date financial statements,
       if self employed.

     - Any gift letters, if you are using a gift from a parent or

       relative or other organization to help pay the down payment

       and/or closing costs. This letter simply states that the money is

       in fact a gift and will not have to be repaid.

Having these items on hand when you visit the lender will help speed up

the application process. Usually an application fee and the appraisal

fee will have to be paid when you submit the mortgage application. This

is only done after you have successfully negotiated on a home and have

had your offer accepted by the seller. Generally, there is no fee for

pre- qualification.

After the initial meeting with the lender, you should have a general

idea if you qualify for the size and type of loan you want. The lender

should let you know if you qualify for the loan in 30 to 60 days. If you

are denied a home loan, the lender must explain the reasons. If this

happens, the lender will usually discuss any options with you.

they want, lenders basically look at two key factors: the borrower's

ability and willingness to repay the loan. Ability to repay the mortgage

is verified by your current employment and total income. Generally

speaking, lenders prefer for you to have been employed at the same place

for at least two years, or at least be in the same line of work for a

few years.

The borrower's willingness to repay is determined by examining how the

property will be used. For instance, will you be living there or just

renting it out? Willingness is also closely related to how you have

fulfilled previous financial commitments, thus the emphasis on the

credit report or rent and utility bills.

It is important to remember that there are no rules carved in stone.

Each applicant is handled on a case-by-case basis. So even if you come

up a little short in one area, perhaps one of your stronger points will

make up for the weak one. Everyone involved in real estate is in the

business of selling homes, in one way or another. Therefore, if the loan

makes sense, lenders and insurers will do their best to see that you

qualify.

By its very nature, mortgage insurance is an aid to affordability,

because it allows families to purchase homes with less cash on hand. The

industry plays a central role in helping low- and moderate-income

families become homeowners.

More and more borrowers are taking advantage of low down payment

mortgages and becoming homeowners with as little as 5 percent down. For

more information on how you can take advantage of the benefits of a low

down payment home loan with mortgage insurance, contact your local

lender or real estate agent. For general information on purchasing a

home, contact the county extension office of the U.S. Department of

Agriculture, listed in the government pages of your telephone book.

PAYMENT TABLE

MONTHLY PAYMENT FOR EACH $1,000 BORROWED

INTEREST RATE       15 YEARS       20 YEARS       30 YEARS

4.00%               $7.40          $6.06          $4.77

4.50%               $7.65          $6.33          $5.07

5.00%               $7.91          $6.60          $5.37

5.50%               $8.17          $6.88          $5.68

6.00%               $8.44          $7.16          $6.00

6.50%               $8.71          $7.46          $6.32

7.00%               $8.99          $7.75          $6.65

7.50%               $9.27          $8.06          $6.99

8.00%               $9.56          $8.36          $7.34

8.50%               $9.85          $8.68          $7.69

9.00%               $10.14         $9.00          $8.05

9.50%               $10.44         $9.32          $8.41

10.00%              $10.75         $9.65          $8.78

This table helps you calculate your monthly housing costs, not including

taxes and insurance. For example, assume you have a 30- year mortgage

and the interest rate is 8 percent. The chart shows that the monthly

payment amount per $1,000 is $7.34. If you want to borrow $75,000, you

can estimate the payment by multiplying 75 x $7.34, which equals $550.50

per month.

As you can see, the lower the interest rate, the easier it is to afford

a home.

     Gross base pay (All wages and salaries other than overtime)

     Net profit (from business)

     Interest and dividends

Other income

     Total gross income (add) =

Deductions

     Income tax (federal, state and local)

     Social Security/retirement

     Insurance (life, health, property)

     Other (charities, etc.)

     Total Deductions (add) =

1. Total take-home pay

Subtract deductions from income =

     Installment payments on car or furniture

     Other debt, over 11 months

     Total long-term debt (add) =

2. Subtract long-term debt from total take-home pay.

Bring forward the number from Step 1 =

     Transportation/auto expenses

     Education

     Medical/dental care

     Clothing and grooming

     Insurance (life and health)

     Child care

     Gifts and charity

     Entertainment and recreation

     Savings

     Other

     Total monthly non-housing expenses (add) =

3. Subtract non-housing expensis from tatal of Step 2 =

     Allowance for property taxes

     Allowance for utilities (heat, water, phone, electricity)

     Allowance for maintenance, furnishings

     Allowance for insurance

4. Total monthly housing expenses (add) =

available (Step 3). If income available from Step 3 does not equal or

exceed monthly housing expenses, then you must re- evaluate your budget

and resources.

Total from Step 3   > OR =  Total from Step 4