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    Conventional or FHA Financing: What’s Best for Buyers? Thursday, October 4th, 2012

    Conventional or FHA, what’s best for buyers? Most buyers today assume that FHA financing, with it’s 3.5% down payment and expensive monthly mortgage insurance premiums “MIP”, is their only financing option if they only have a low down payment! Instead, show buyers how to purchase a home with a low down payment and NO mortgage insurance, using the Conventional 5% Down and NO mortgage insurance “MI” Program. Check out the huge savings when purchasing with this program versus FHA! In this $400k scenario below, the conventional buyer saves $375 a month over the FHA buyer and $35k over the next 10 years.

    Compare a $400k Purchase Using FHA vs Conventional

    Here is a scenario below that compares a buyer purchasing a $400k home with the “Conventional 5% Down NO MI Purchase Option”, versus a FHA buyer using FHA financing and 3.5% down.

    On the left column is the conventional option. The buyer has a loan of $380k (5% down), and gets a rate of 3.75% on a 30 year fixed. The buyers total PITI (principle and interest, taxes and insurance) payment is $2,176 a month.

    On the right hand side is the FHA option. The buyer has a loan of $386k (3.5% down) and gets a rate of 3.5% on a 30 year fixed. The buyers total PITI (principle and interest, taxes, homeowners including FHA insurance) payment is $2,552 a month. *This is an increase of $376 a month and $35k over the next 10 years!

    The conventional buyer saves $376 a month and $35k over the next 10 years. You can see below just how much more in interest and mortgage insurance the FHA buyer will pay in total over the next 10 years, compared to the conventional buyer.

    In Summary. Instead of buyers going with FHA and paying the expensive mortgage insurance each month, buyers should look into the conventional loan option too, because it will always have a lower overall monthly payment because there is NO monthly mortgage insurance.

    Also, monthly savings of $375 goes along way for many buyers these days! For example, it can mean a new car payment for some, or additional savings they can put into a college fund for kids or retirement. Or a buyer can also turn around and put the additional $375 monthly savings into purchasing a bigger home, in this scenario above, the conventional buyer can afford to buy $50k more in home, and still have the same overall monthly payment as the FHA buyer.

    FAQ’s About the Conventional 5% Down NO MI Program

    Here are a few of the most frequently asked questions that buyers and agents have in regards to the Conventional 5% down NO MI loan option.

    1. What is the maximum loan amount with 5% down?

    The maximum loan with 5% down is $417k which is the conventional loan limit. But this program is also available on Fannie Mae jumbo loans up to 90% loan to value, for example in San Diego a buyer can finance up to $546k (Fannie Mae jumbo loan limit) with NO monthly mortgage insurance.

    2. Can you get 5% down No MI on 2nd homes or Investment Properties?

    No, the 5% down option is for Primary Residences only. But you can still get 90% financing on 2nd homes with this loan program. This program is NOT available on investment properties as you have to put down a minimum of 20%, which eliminates mortgage insurance anyway.

    3. Why is there NO mortgage insurance?

    It is very simple. All a buyer has to do is take a slightly higher interest rate than normal, say from 3.5% to 3.75%. The additional yield (lender credit) available on the higher rate “buys out” the mortgage insurance. Essentially the mortgage insurance get paid off upfront using the lender credit.

    4. What credit score is required to qualify?

    There are a few lenders that only require a 620 credit score to qualify for this loan program. *But note the lower the credit scores, the higher the interest rate will be.

    5. Are there reserves required for this loan program?

    Yes, usually the program requires at least one month of reserves, which is equal to one monthly mortgage payment.

    6. Can the buyer receive the 5% down payment as a gift?

    Unfortunately NO, the 5% funds must come the buyer. The funds have to sourced and seasoned in their bank account for 30 days.

    7. Do condos qualify for the NO MI 5% down program?

    Yes, buyers can purchase condos with only 5% down and qualify for this loan option. *This is a great option in complexes that are NOT FHA approved.

    8. Isn’t FHA rates lower than conventional rates on this program?

    FHA rates are lower, but when you factor in the very expensive FHA monthly mortgage insurance, the overall monthly FHA mortgage payment will always be higher than the conventional payment. (*see scenario above for an example comparing both loan options).



    Tips for Buyers

    This is a great purchase option for buyers. This program helps buyers obtain home ownership with a minimal down payment, without having to pay expensive FHA monthly mortgage insurance every month, and gets them a much lower overall monthly payment. Now buyers can turn around and put the extra savings into a college fund or retirement, or back into the loan to pay it down, or even buy a new car with the monthly savings.

    But FHA is also a great program too, especially when buyers do not have the 5% down that is required for conventional, and are also getting a gift towards their down payment. Also if a buyers credit scores are below 700, FHA is sometimes a better option than conventional, as FHA is NOT credit score driven, whereas conventional financing is very strict on credit scores and interest rates are priced higher if credit scores are lower. The best thing to do is to compare both options, and see what is the best fit for your home loan needs.

    If you have any questions about this Conventional 5% down program with NO monthly mortgage insurance, or you would like to get per-approved for financing, please feel free to contact me directly at 858-200-9602 or by email at mdeery@citywidefinacialcorp.com