One of the most common barriers to entry to the real estate market is the down payment. This is particularly true for first time home buyers, many of whom have difficulty accumulating the typical 20% down payment required by a conforming loan. There are, however, other low down payment options available for specific buyers. At Esquire Real Estate Brokerage, Inc., where many of our clients are first time home buying young professionals, we make sure we are apprised of different loan options that may make the process easier.
A little known option specifically available to lawyers, doctors, dentists, and accountants is the 5% down payment loan, with no private mortgage insurance (PMI). There are several banks who currently offer this option, including BBVA Compass and Bank of America. The loan limit is typically $1mm, with 10% down payment options available for loans up to $1.5mm.
These types of loans are especially important for young professionals who have high income but have not yet been able to accumulate the significant funds necessary to make a 20% down payment. The drawback to these types of loans is that they typically charge a higher interest rate than loans with a 20% down payment. From the bank’s perspective, this makes sense because they are accepting greater risk. At the same time, they are willing to make the loans because the borrowers tend to be highly qualified individuals who can afford the monthly payments.
One of the strategies we recommend to our buyers who are considering the 5% down payment option is to structure the loan as an adjustable rate mortgage (ARM), thereby adjusting the interest rate downward. This gives the buyer the ability to acquire a property with 5% down, then subsequently accumulate additional funds, pay the loan balance down to 80%, and then refinance at 20% equity with a conforming loan at a low interest rate. In the meanwhile, rather than burning funds on rent, our client has taken advantage of the mortgage interest tax deduction and has also built equity in his or her home via payments and appreciation.
For more information on how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.
