There is a terrific mortgage program available for borrowers who want to purchase a home or refinance! It is a conventional mortgage that only requires a 5% down payment, or 5% equity, and there is also an option to eliminate the monthly mortgage insurance “PMI”. Too many homebuyers or homeowners today assume they have to take a loan with monthly mortgage insurance if they only have a limited down payment or limited equity, or they need to put down 20% to eliminate the monthly mortgage insurance. Instead, buyers now have the option to purchase a home with only 5% down and No monthly mortgage insurance, and also get a low 30 year fixed rate loan. Here is how to qualify for this program.
A Great Low Down Payment Option for Buyers
As housing markets across the country continue to appreciate in value, it is a very positive sign that lenders are continuing to offer low down payment programs with an option to eliminate the monthly mortgage insurance, which is helping buyers get into homes with low affordable mortgage payments.
I believe the conventional loan program that requires only 5% down and has the option to eliminate the monthly mortgage insurance, is the best low down payment available for buyers in the market, as this loan option will help buyers obtain the lowest monthly payment on their home loan.
Compare the Savings on a $400k Purchase With and Without Mortgage Insurance
On this $400k home purchase example, we will compare the savings on a conventional 5% down loan, with and without monthly mortgage insurance, and a FHA 5% down loan with monthly mortgage insurance. We will assume a buyer has a 740 credit score. We will also use $400 a month for property taxes, and $75 a month for a homeowner’s insurance policy, so we can calculate what the total monthly PITI (principal and interest, taxes and insurance) payment is for each scenario. Please note, the interest rates used in this example below are NOT current, please ask me what current interest rates are for this program.
Option #1. The figures on the first column, is a conventional 5% down loan with No monthly mortgage insurance. The rate on the conventional 30 year fixed with No PMI is 4.5% with no points. The total monthly PITI payment is $2,400.
Option #2. The figures on the second column, is a conventional 5% down loan with monthly mortgage insurance. The rate on the conventional 30 year fixed with monthly mortgage insurance is lower at 4.25% with no points, but there is also monthly mortgage insurance of $207. The total monthly PITI payment is $2,551.
Option #3. The figures on the third column, is a FHA 5% down loan with monthly mortgage insurance. The rate on a FHA 30 year fixed is lower at 4%, but there is also monthly FHA mortgage insurance of $412. There is also a FHA funding fee of 1.75% due on all FHA loans, this fee of $6,650 was added to the loan amount in this example. The total FHA monthly PITI payment is $2,732.
As you can below, option #1 with the conventional loan and no monthly mortgage insurance will help you obtain the lowest monthly payment and save you the most money. It will save you $151 a month over the conventional loan with mortgage insurance, and saves $332 over the FHA loan.
As you can also see below, over the next 10 years the conventional loan with no monthly mortgage insurance will save $13,177 over the conventional loan with mortgage insurance, and $40,141 over the FHA loan.
In Summary. The conventional loan with No monthly mortgage insurance will help the buyer obtain the lowest monthly payment for a home purchase. Or, the conventional buyer can also use the additional monthly savings to purchase more home.
Frequently Asked Questions on the 5% Down Program with No PMI
Here is a list of the most frequently asked questions that homebuyers and Realtors have about the conventional 5% down with no monthly mortgage insurance.
1. What is the maximum loan amount with 5% down?
The maximum loan with 5% down is $417k, which is the conventional loan limit. This No PMI option is also available with 10% down financing on conventional jumbo loans. For example, in San Diego a buyer can finance a jumbo loan up to $546k and only put down 10% to eliminate the PMI. In Orange County and LA you can finance a loan up to $625k and only put down 10% to eliminate the monthly PMI, which are the Fannie Mae jumbo loan limits for these respective counties. See HERE for more information on the 10% Jumbo option with No PMI
2. Can I receive the 5% down payment as a gift?
Yes, all of the 5% down payment can be gifted on this program.
3. What credit score is required to qualify for this program?
We only require a 620 credit score to qualify for this loan program. Please note, the lower the credit scores the higher the interest rate will be.
4. How do you Eliminate the Mortgage Insurance on this program?
It’s very simple. All you have to do is take a slightly higher interest rate than normal, say from 4.375%% to 4.625%, and we use a lender credit with the higher interest rate to eliminate the PMI from the mortgage payment.
5. Can I get 5% down with No PMI on 2nd homes or Investment Properties?
No, the 5% down is for Primary Residences only. On 2nd homes, you only have to put down 10% to obtain the No PMI payment option. On investment properties this program is not available, as you have to put down 20%, which eliminates the Mortgage insurance anyway.
6. Are co signers allowed on this program?
Yes co-signers are allowed on this program, the co-signer does NOT have to reside in the home.
7. Is this program for first time buyers only?
No, this program is available for all buyers.
8. Are there income limits for this program?
No, any buyer can qualify for this program regardless of income.
9. Do condos qualify for this program?
Yes, you can also purchase a condo using this program with only 5% down and get the No PMI option.
10. But FHA rates are lower than this program?
Yes FHA rates are lower, but when you factor in the very expensive FHA monthly mortgage insurance, the FHA overall monthly payment will always be higher than this 5% down No PMI option.
11. What if I Put Down 10% or 15, Do I Get a Lower rate?
Yes, if you put down 10% or 15% as a down payment, you will get a lower interest rate. Essentially the larger the down payment, the lower the interest rate you will get with conventional financing.
4 Other Great Benefits for Using Conventional Financing vs FHA for Buyers
There are some other great benefits to using this conventional program with no monthly mortgage insurance vs FHA financing, so you have have more available homes to choose from.
1. This conventional program is a great option for buyers in complexes that are NON FHA approved, so now you have more inventory to choose from and agents have more homes to show them!
2. This conventional program will help you afford to purchase a single family home instead of a condo, as it frees up having to pay monthly mortgage insurance and HOA dues, which can amount to roughly $600-$700 a month on a typical condo. This will open up a lot more inventory you to purchase.
3. Conventional does NOT have an anti-home flipping policy, which means conventional buyers are allowed to purchase homes that are being fixed up and flipped by investors with less restrictions. So now you don’t have to worry about the FHA’s strict anti-home flipping policies either (which may require 2 appraisals etc)!
4. Compared to conventional financing, FHA appraisals can be a little more strict in terms of asking sellers for repairs on a property, so this is another benefit of going conventional.
It is important to get creative to find a home and get into contract these days, and this program is one way to help you do that!
*Refinance Tip For Homeowners
This program also works the same for refinances, as homeowners with limited equity can now refinance up to 95% of their home without having to pay any monthly mortgage insurance.
For example, many homeowners who bought a home over the past 12-24 months using a FHA loan and a minimum down payment of 3.5%, have probably gained at least 10-15% equity again due to appreciation. So this loan program is a great option to help them refinance out of their current jumbo loan with mortgage insurance, and into this conventional loan option with No PMI, so they can save some extra money and get a lower monthly payment.
We have been able to help many of our clients who bought over the past few years with FHA, refinance into this conventional program and save on average $200-$300 a month.
If you would like to get approved for this program, or you have any questions about any of this information above, please feel free to contact me directly at 858-442-2686. I look forward to chatting soon.