Mortgages for Homes and Small Business Financing

Conventional v. FHA Low Down Payment Mortgages

Lenders offer conventional mortgages with low down payment requirements as Fannie Mae and Freddie Mac are providing consumers with a good alternative to FHA mortgages.  The conventional loan will cost less for the following reasons:

  • Smaller down payment requirements: The down payment for a 97% LTV mortgage is 3% and the current requirement for an FHA loan is 3.5%.
  • No upfront mortgage insurance premium: In order to secure an FHA loan, consumers must pay an upfront mortgage insurance premium (UFMIP) in full at the time of closing, or finance the premium by adding it to the loan amount. The current UFMIP is 1.75% of the loan amount.  For example, if the loan amount is $250,000, the UFMIP is 1.75% of $250,000, or $4,375. Consumers with a conventional 97% LTV mortgage will not be required to pay or finance an upfront mortgage insurance premium.
  • Ability to cancel mortgage insurance: Borrowers with a conventional 97% LTV mortgage are protected by the Homeowners Protection Act, which requires the automatic termination of private mortgage insurance when a borrower’s LTV ratio reaches 78%. The law also allows borrowers to request the termination of private mortgage insurance when the LTV reaches 80%. Canceling the mortgage insurance for a non-conventional FHA loan is a much more complicated matter.

In 2013, the Department of Housing and Urban Development (HUD) made changes to its policies regarding the cancellation of mortgage insurance premiums (MIPs).  According to HUD’s Mortgagee Letter 2013-04,  “For any mortgage involving an original principal obligation…with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.”

With this policy in place, most consumers who finance a home purchase with an FHA loan will pay insurance premiums until their mortgage is paid in full or until they are able to refinance their loans.  By offering cash-poor but creditworthy consumers the opportunity to purchase a home without making mortgage insurance payments for up to 30 years, a conventional 97% LTV mortgage has the potential to be a very popular product.

What are some of the reasons that FHA mortgages will remain popular?

  • The rates for FHA are typically less than conventional mortgages due to the fact that they are insured through a government program.
  • FHA programs allow lower credit scores with smaller down payments.  If your score is too low you may be required to make a larger down payment.
  • FHA mortgages allow greater flexibility with debt-to-income ratios while still retaining their qualified mortgage status.
  • If your credit score is not above 680, you will pay more than two times as much for a monthly conventional loan (1.90%) than you will for the FHA monthly mortgage insurance (0.85%).

Call me to help determine which program might be best for you and your current situation.

 

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