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Wednesday, 14 January 2015 00:00

FHA vs 3% down Conventional

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Great News!

I love saying that because it seems over the last five or six years everything's been, heads up this bad thing is happening.  Not this time, there are two changes that are great news for the housing market.  Conventional 3% down is back & FHA has reduced there monthly mortgage insurance!  Let me explain . . .

First a little history on the way this all went down.  Back middle of December 2014 Fannie Mae announced that they were bringing back the 3% down conventional loan program.  The program had gone away a few years ago during all the tightening.  The new 3% down program has some fairly tight credit qualification, but overall is a great option for first time buyers with a good credit history.  When compared to FHA at the time the mortgage insurance was less in most cases.   Personally I think what happened after the Fannie announcement is FHA did a little math and figured out that they were going to lose the pool of buyers that had good credit. Then the loans they would end up with in their portfolio would be the more troubled loans.   Think 1000's of loans, when your looking at x% go into foreclosure now; losing the strong loans means  x% that go bad is a lot higher.  Not good if your FHA!

So here were are less than a month later and FHA announce a huge reduction in monthly mortgage insurance.  Which means the FHA program is more attractive now to most buyers seeking low down payment options.

Lets look at an example: (note PMI and rates vary based on a number of factors such as credit score, so specific borrower will see slightly different numbers.)

  Conv. Old FHA New FHA
Purchase Price $150,000 $150,000 $150,000
Down Payment $4,500 $5,250 $5,250
Upfront PMI $0 $2,533 $2,533
Monthly PMI $158.84 $161.54 $101.71
PMI Paid After 5 yrs $9,530.40 $12,225.40 $8,635.60

One more thing that should be mentioned.  With the 3% down conventional the interest rate is higher than FHA, how much higher depends on credit and other factors. Expect to see roughly a .5% higher interest rate.  That combined with the higher PMI makes the FHA option rule over a 3% down conventional in most cases.  The one down side to FHA is that the mortgage insurance never goes away.  I'd love to see FHA go back to the days where the MI dropped off when the loan reached a 78% loan to value.  So I suppose buyers who are going to be in the home for many years may be better off with a conventional 3% down loan over FHA.  However most people move every 5 years or so.

Check out the short video I made for more information or give me a call!