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    Conventional vs FHA: Compare a $400k Purchase using 3% Down Conventional Financing vs 3.5% Down FHA Monday, April 13th, 2015

    The new 3% down conventional mortgage is a great purchase option for buyers compared to FHA, as buyers have the option to remove the monthly mortgage insurance “PMI” from their mortgage payment. The 3% down mortgage program also allows ALL of the down payment to be gifted just like FHA, so now buyers can reach out for a gift instead of having to wait and save up the full 3% down payment. So which is the better option for buyers? Check out this example below comparing a $400k conventional 3% down purchase to FHA.

    Compare a $400k purchase with conventional 3% down and No PMI vs FHA

    There is an option for buyers to remove the monthly mortgage insurance “PMI” from their payment on the 3% down conventional morrtgage. This will help buyers obtain the lowest monthly payment on their home loan.

    Here is an example of a $400k purchase, comparing a conventional 3% down loan with No monthly mortgage insurance “PMI”, versus a FHA 3.5% down loan.

    On the left side is the conventional 3% down No PMI loan option. You only have to put down 3% which amounts to $12k. You can get a 30 year fixed rate of 3.99%. The total monthly PITI payment is $2,243.

    On the right hand side is the FHA 3.5% down payment option, which amounts to $14k. You can get a lower interest rate of 3.5%, but you also have to pay monthly FHA mortgage insurance of $409 a month. On a FHA loan, you also have to pay an upfront FHA funding fee of 1.75%, which amounts to $6,755. The FHA  total monthly PITI payment (including FHA mortgage insurance) is $2,566.

    The conventional 3% down loan option with NO PMI saves you $323 a month over the FHA loan.

    Over the next 15 years, you will save $56,485 with the conventional loan over the FHA loan (see below).

    Remember too, when you put down less than 10% with FHA, you will have to pay FHA mortgage insurance for the life of the loan, see HERE

    In Summary. Instead of taking the FHA loan option and paying the expensive FHA mortgage insurance each month, the conventional loan with No PMI will give you  the lowest monthly payment.

    Or you also can turn around and put the additional $323 monthly savings into purchasing an extra $50k in home and still have the same monthly payment as the FHA loan.

    3% Down Conventional Frequently Asked Questions

    Here are the most frequently asked questions that buyers and real estate agents have in regards to the new conventional 3% down loan option.

    1. What is the maximum loan amount with 3% down?

    The maximum loan with 3% down is $417k, which is the conventional loan limit.

    2. Can I receive the 3% down payment as a gift?

    Yes, all of the 3% down payment can be gifted on this program. Closing costs and reserves can also be gifted if needed.

    3. What credit score is required to qualify for this program?

    Only a 620 credit score is required to qualify for this loan program. Please note, the lower the credit scores the higher the interest rate will be.

    4. How do I eliminate the monthly mortgage insurance “PMI” from the payment on this program?

    It’s very simple. All you have to do is take a slightly higher interest rate than normal, say from 4% to 4.25%, and we use a lender credit with the higher interest rate to eliminate the PMI from the mortgage payment. This is also known as lender paid mortgage insurance.

    5.  Can I buy a home with 3% down on 2nd homes or investment properties?

    No, the 3% down is for Primary Residences only.

    6. Is this program for first time buyers only?

    Yes, but as long as you have not had any ownership in a property in the past 3 years, you can also qualify for this program. Or if there are 2 buyers, only one of the buyers must be a first time buyer.

    7. Are there income limits for this program?

    No, any buyer can qualify for this program regardless of income.

    8. Do condos qualify for this program?

    Yes, you can also purchase a condo using this program with only 3% down.

    9. But FHA mortgage rates are lower than this program?

    Yes FHA interest 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 the conventional loan option with No monthly PMI.

    10. What if I put down 5% or 10%, will I get a lower rate?

    Yes, if you put down 5%, 10% or even 15% for the 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 reasons to use Conventional vs FHA

    There are some other great benefits to using this conventional program vs FHA financing, so you have have more available homes to choose from.

    1. This conventional program is a great option for buyers who want to purchase a home 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 buyers 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 for buyers 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 buyers don’t have to worry about the FHA’s strict anti-home flipping policies either (which may require 2 appraisals etc)! In fact, the FHA just announced they are not extending their Anti-flip waiver, which means FHA buyers have to wait 90 days before they can buy a flipped home.

    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 using this conventional program.

    It is important to get creative to find a home and get into contract these days, and this new conventional program is one way to help you do that!

    If you have any questions about this new conventional program or getting approved for financing, please feel free to contact me directly at 858-442-2686.