Are 95% Mortgage Loans Still Available These Days?
We get a lot of questions from readers asking about low and no-down-payment home loans. Where can I get 100% mortgage financing these days? Are 95% mortgage loans still available? That sort of thing. I thought it might be helpful to address several of those questions in one article series. We will start with the 95% question. In part 2 of this lesson, we will discuss 100% financing.
Where to Find 95% Mortgage Financing
During the housing boom, it was incredibly easy to find 95% mortgage loans. This is a financing scenario where the borrower puts down only 5% of the purchase price, while the lender covers the remaining 95% in the form of a home loan.
But things have changed since then. Lenders today are less willing to offer such large loans, due to the higher level of risk they carry.
That doesn't mean you're out of options completely. It just means you might have to shop around to find the right product. Here are some ways you could get 95% mortgage financing.
Option 1 -- FHA Loans
Federal Housing Administration (FHA) loans offer a down payment as low as 3.5%, which creates a loan-to-value (LTV) ratio of 96.5%. This program is open to all qualifying borrowers -- not just first-time buyers.
Granted, you'll have to pay for mortgage insurance on top of the principal amount. So it's a more expensive option, when compared to a conventional loan with 20% down (and no insurance required). But for many borrowers, it's the only option. It certainly meets the needs of those seeking a 95% mortgage.
You can apply for the FHA program using the link provided on the application page of our website.
Option 2 -- Conventional 95% Mortgage
Another option is to apply for a conventional home loan with an LTV of 95%. In this context, "conventional" refers to a mortgage that is not insured by the government, which sets apart from FHA loans that do receive government backing.
As mentioned earlier, this type of financing was fairly easy to secure during the housing boom. When the market crashed, 95% conventional mortgages nearly became extinct. They now seem to be re-emerging, as more and more lenders offer them.
According to a 2013 press release from Zillow, lender offers / quotes with down payments between 3.5% and 5% increased by 570% from 2011 to 2013. This was based on data from the Zillow Mortgage Marketplace, an online network of lenders.
So while they are still more rare than in the boom days, 95% home loans appear to be making a come back in 2014 and going into 2015.
According to an article in the The New York Times:
"Bank of America said it allowed up to 95% of the home value to be financed, with mortgage insurance, in certain regions."
Other lenders are following the Bank of America example. In 2014, we did a story about TD Bank offering a 3% down-payment mortgage with no additional insurance attached to it (a rarity).
So clearly, these products are out there. You just have to turn over a few stones to find them. As a borrower, you may need to shop around to find a lender willing to accommodate a 5% down payment. But there are options.
Option 3 -- Piggyback Loans
Piggyback loans also appear to be making a comeback, and they offer an alternative path to 95% mortgage financing to qualified borrowers.
Unlike the options mentioned above, this strategy calls for the combination of two home loans (or one plus a line of credit).
The 80-15-5 financing strategy is a good example. This is where the borrower takes out a first mortgage for 80% of the purchase price or appraised value, along with a second loan for 15%. The borrower pays the remaining 5% as a down payment. So the total mortgage financing adds up to 95%, with no more than 5% out of pocket.
An added benefit of this strategy: You could avoid private mortgage insurance (PMI). That's because neither of the loans would exceed 80% LTV ratio, which is normally the trigger for PMI coverage.
This strategy was all the rage during the housing boom. But many lenders stopped allowing it after the market crashed. (Noticing a pattern here?) Piggyback financing is starting to re-emerge in the marketplace, but most of them are 80-10-10 scenarios where the borrower makes a down payment of 10%.
According to The New York Times:
"Wells Fargo and U.S. Bank let qualified borrowers take out two loans -- one for 80 percent of the home's value and the second for 10 percent, along with a 10 percent down payment -- which lets them avoid private mortgage insurance."
We have received anecdotal reports of lenders offering the 80-15-5 version of piggyback loans, as well. But they seem to be a rare occurrence, compared to the 80-10-10 products. So here we have another 95% mortgage option that may be hard to find.
Option 4 -- Fannie Mae's HomePath 97% Mortgage
Fannie Mae, one of the two government-sponsored enterprises that buy and sell mortgages, offers a financing product known as the HomePath® Mortgage. This loan product offers 97% financing to home buyers, with no appraisal and no private mortgage insurance (PMI).
Is there a catch? You bet. To be eligible for HomePath financing, borrowers must purchase one of Fannie Mae's REO / foreclosure properties. Lenders typically require excellent credit scores for this program, and they may charge a higher interest rate due to the higher LTV ratio. To learn more about the program, and to see a list of eligible properties in your area, visit HomePath.com.
2014 Update: Fannie Mae retired the 97% version of their HomePath financing at the end of 2013. Going forward, these loans "require at least a 5% down payment that can be funded by your own savings, a gift, a grant; or a loan from a nonprofit organization, state or local government, or employer," according to the company's website.
Recap: Borrowers who need 95% mortgage funding should consider a conventional loan with PMI, a piggyback financing scenario, and the FHA program. You might have to shop around to find a lender willing to allow a smaller down payment, and you might end up paying for additional mortgage insurance that could increase the size of your monthly payments.