Conventional Low Down Payment is Cheaper than FHA Alternative
Conventional financing with a 3% down payment is, for certain home buyers, a far better option than FHA financing.
Most people think they need a 20% down payment to use conventional financing, that’s simply not true. This is a common misunderstanding that first time home buyers have.
The truth will shock you!
FHA Mortgage Insurance Premiums
Mortgage insurance is required anytime the first mortgage exceeds 80% of the value of the home.
FHA financing has mortgage insurance built in. What this basically means is that if you qualify for FHA financing, you qualify for FHA mortgage insurance, which adds two separate fees to your FHA mortgage loan.
These two fees are Upfront Mortgage Insurance (UFMIP) and Annual Mortgage Insurance (MIP) which translates into a monthly mortgage insurance payment.
Recently, FHA mortgage insurance increased to 1.75% upfront, and 1.25% annual/monthly causing more home buyers to look for less expensive alternatives.
Conventional financing is that alternative for home buyers with high credit scores and low debt to income ratios.
Private Mortgage Insurance
Many first time home buyers do not think that conventional financing is a good option because it’s harder to qualify or requires a larger down payment than FHA.
While it is true that conventional financing can be more strict and a little harder to meet the qualifying requirements, if you are one of those home buyers that can qualify, it’s a far less expensive loan than FHA.
Using conventional financing, if your first mortgage loan amount exceeds 80% of the value of the home you need to qualify for private mortgage insurance.
Unlike FHA, qualifying for private mortgage insurance is not automatic, at least it hasn’t been for the past few years. That has changed this last week.
Recent changes to private mortgage insurance guidelines now basically mimic conventional qualifying guidelines.
Conventional is Cheaper than FHA
Conventional financing is cheaper than FHA if you have a credit score of 720 or higher and your debt to income ratios are at or below 45%
Let’s look at the difference on a $300,000 home purchase.
FHA Financing – 720 Credit Score / 50% DTI
- Down Payment: 3.5% = $10,500
- Upfront Mortgage Insurance Premium: 1.75% = $5,066.25 (added to loan amount)
- Financed Loan Amount: $294,566
- Monthly Mortgage Insurance Premium: 1.25% = $306.84 Monthly
Conventional Financing – 720 Credit Score / 50% DTI
- Down Payment: 3% = $9,000
- Upfront Mortgage Insurance Premium: NONE
- Financed Loan Amount: $291,000
- Monthly Mortgage Insurance Premium: 1.15% = $278.88 Monthly
NOTE: Conventional financing does have a .50% loan level price adjustment that will add $1,455.56 to your closing costs
If you put 5% down instead of 3% using conventional financing? Your mortgage insurance payment is almost cut in half to .67% or $162.48
The moral of the story is, there’s more than one way to live happily ever after if you have good credit.
If you have questions about what programs are best for you? Shoot us an email or leave a comment below and let’s take a closer look at your options.