There has been an increase recently in first time homebuyers getting into the market to purchase a home. With annual rents continuing to increase on average 3% – 4% in most parts of California, homeownership is starting to look like a more viable option for many renters. There are terrific mortgage programs available for first time buyers to help them finance a home, some only require 3% down.
Rising Rents are driving first time buyers into the market
Annual rents have been increasing on average 3% – 4% in most areas of California. As you can see below, just a 4% increase in annual rent can drive a $1,500 monthly rent up to $1,974 in just 8 years, an increase of $474, which is a 32% increase in overall rent.
Compare this to buying a home and obtaining a low fixed rate and monthly payment that will not change. This is why it is important that buyers understand that home ownership is also a hedge against inflation and rising rents.
When you factor in the additional benefits of tax deductions and appreciation that come with home ownership, these are just some of the reasons why there has been a influx of new first time buyers looking to purchase a home in 2015.
The Impact of Rates on Buyer Purchasing Power
Changing mortgage rates do more to influence home affordability than changing home prices. This chart below shows the “impact of rates on buyer purchasing power or affordability“. As you can see below, when rates increase by just .5%, a buyer loses 5% in purchasing power or affordability. Or vice versa, when rates decrease by .5%, a buyer gains 5% in purchasing power.
For example, see how the payment at the 3.75% rate on a $400k loan, is roughly the same payment as the 4.25% loan at $380k, a gain of 5% in purchasing power for a buyer.
As rates have been trending higher in 2015, and coupled with rising home prices in most areas, the overall cost to purchase a home has been increasing.
Market experts are expecting rates to increase over 4.5% in the next 12 months, and home prices to increase another 5%-6% in the next 12 months, so the payment for a home purchase will probably be higher in 12 months than it is today.
The conventional 3% down mortgage is the best mortgage option available for first time buyers in today’s market. This program is helping many first time buyers obtain home ownership, who may have not been able to otherwise. It is also allowing buyers to purchase a home with a low down payment and a low fixed rate.
It also allows ALL of the down payment to be gifted, so this means buyers can reach out for a gift instead of having to wait and save up the full 3% down payment.
There is also an option to eliminate the monthly mortgage insurance “PMI” from the mortgage payment, so this is helping buyers obtain an even lower monthly payment.
Let’s compare the conventional 3% down mortgage with No PMI to other low down payment options to purchase a home.
On this $400k home purchase example, we will compare the savings on a conventional 3% down loan, with and without monthly mortgage insurance, and a FHA 3.5% down loan with monthly mortgage insurance.
To calculate property taxes, we will also use 1.2% of the purchase price, so $400 a month, 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.
Option #1. The figures on the first column, is a conventional 3% down loan with No PMI. The rate on a conventional 30 year fixed with No PMI is 4.375%. The total monthly PITI payment is $2,412.
Option #2. The figures on the second column, is a conventional 3% down loan with PMI. The rate on a conventional 30 year fixed with monthly mortgage insurance is lower at 3.99%, but there is also monthly mortgage insurance of $354. The total monthly PITI payment is $2,680.
Option #3. The figures on the third column, is a FHA 3.5% down loan with monthly mortgage insurance. The rate on a FHA 30 year fixed is 4%, but there is also monthly FHA mortgage insurance of $278. There is also a FHA funding fee of 1.75% due on all FHA loans, this fee of $6,755 was added to the loan amount in this example. The total FHA monthly PITI payment is $2,628.
As you can below, option #1 with the conventional loan and No PMI will help you obtain the lowest monthly payment and save you the most money. It will save you $269 a month over the conventional loan with PMI, and saves $216 over the FHA loan.
Over the next 15 years the conventional loan with no PMI will save $15,889 over the conventional loan with PMI, and $39,022 over the FHA loan.
In Summary. Instead of taking the conventional or FHA loan option and paying the mortgage insurance each month, the conventional loan with No PMI will give the buyer the lowest monthly payment.
Remember too, if you put down less than 10% with FHA, you have to pay the monthly mortgage insurance for the life of the loan, click HERE for a summary of the current FHA mortgage insurance rules.
3% Down Conventional Frequently Asked Questions and Answers
Here are the most frequently asked questions that buyers and real estate agents have in regards to the conventional 3% down mortgage.
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?
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 4.375%, 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 the Conventional 3% down program will benefit buyers 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.