Tag: pmi

Why Conventional Loans are Better than FHA Loans

conventional loans vs fha loans

Conventional Loans are home loans that conform to the underwriting guidelines set by the Government Sponsored Entities, Fannie Mae and Freddie Mac.  In the past, conventional loans were only for elite borrowers that had 20% or more for their down payment. Times have since changed opening up great new programs for low to middle income earners and first time homebuyers.

Why are Conventional Loans Better than FHA Loans

Conventional Loans are now an affordable option for those without the highest credit scores. Mortgage Interest Rates are currently in a tighter spread. By this I mean that the best creditor borrowers and the lower score borrowers will have an interest within 1% to 1.5% of each other.

This is helped by programs like Fannie Mae’s HomeReady Loan and Freddie Mac’s HomePossible Loan. These programs limit the loan level price adjustments (LLPAs) which increases the par offering rate. These programs also allow first time homebuyers to buy a home with only 3% down while FHA requires a minimum down payment of 3.5%.

In the past, Private Mortgage Insurance (PMI) rates would also be absurdly high for lower score borrowers seeking Conventional mortgages. With the competition between PMI companies, mortgage insurance rates have dropped significantly in the past few years. This allows Conventional loans to be very competitive with Government Insurance Loans like FHA mortgages.

Related: See our Conventional Mortgage Calculator

FHA Mortgage Insurance Cost May Cost More than Conventional Loans

Conventional loans may be a better option for homebuyers than FHA Mortgages because of the mortgage insurance savings. On Conventional loans, there is typically a monthly PMI fee if a borrower does not put a 20% down payment towards their purchase. FHA has a similar fee plus an up front charge.

Related: See our FHA Mortgage Calculator

FHA Mortgage insurance VS Private Mortgages Insurance

FHA Mortgage InsurancePrivate Mortgage Insurance
Required on all Loans Required on conventional mortgages with less than 20% down
Two Types of mortgage insurance May be dropped once loan to value is under 78%
Cannot be removed if down payment is less than 10%
What is an FHA Up Front Mortgage Insurance Premium?
May be more expensive Many options for PMI payments
Offers Reduce Premiums for First Time Homebuyer Programs

FHA Loans charge two types of Mortgage Insurance Premiums (MIP). There is Upfront Mortgage Insurance Premiums (UFMIP) which are payable to HUD at close. The UFMIP is calculated as a percentage of the original loan amount. This fee is currently set at 1.75% of the base loan amount. For example, If you borrower $200,000, the FHA UFMIP added to your loan amount is $3,500. This is an extra expense not found on Conventional Loans.

What is an FHA Annual Mortgage Insurance Premium?

The Second type of Mortgage Insurance on FHA Loans is Annual Mortgage Insurance Premiums (MIP). This calculation varies based on loan-to-value and loan term but is as high s .85% of the original loan amount. For example, if you borrowed $200,000 the annual MIP would be $200,000 * .0085 = $1,700 which is split up over 12 months and added to your monthly mortgage payment. In this example, your payment would increase by $141.67 for MIP.

April 2013, FHA made a major change which started the shift away from this loan type. They changed the way annual FHA mortgage insurance fees were charged by making FHA Mortgage Insurance Premiums payable for the life of the loan. In past years, it would drop off under certain circumstances similar to Conventional Loans when your loan was paid under 78% of the home’s value.

Conventional Loans are more Attractive to a Seller than FHA Financing

In many areas of the country, there is a shortage of homes for sale which creates a sellers market. This means that sellers can be more picky when accepting offers from buyers on their homes.

When a buyer is making an offer with FHA financing, a seller may be reluctant to accept due to additional requirements for the home’s conditions compared to Conventional Financing. Having a Conventional Loan Pre-Approval may make the difference from getting your offer accepted or getting rejected by a seller.

Why Would Anyone Still Do FHA Loans over Conventional Loans?

There are certain circumstances where FHA finance may be a better option than a Conventional Loan.

FHA Loans with Down Payment Assistance

Many Mortgage Down Payment Assistance Programs (DPA) work only in conjunction with FHA financing. If a borrower does not significant funds available or down payment, DPA programs may help the buy a home.

FHA Loans Allow for Lower Credit Scores

Conventional Loans have minimum credit score requirement of 620. If a borrower has a credit score lower than this, FHA financing may be the only option. Currently FHA allows for credit as low as a 530 with a 10% down payment or as low as 580 with only a 3.5% down payment. Many borrowers with a credit score lower credit scores may have no problems qualifying for FHA financing when Conventional loans are not an option.

FHA Loans Have Shorter Wait Periods Than Conventional Loans

FHA loans have shorter wait periods for major life events such as bankruptcy or foreclosure.

  • FHA loans only require a 2 year wait period from Chapter 7 Bankruptcy while Conventional requires 4 years.
  • FHA requires a 3 year wait period for foreclosures while Conventional Loans require 7 Years.
  • These wait periods may allow a borrower to buy a home with FHA financing while conventional is not an option.

FHA Loans allow for Higher Debt To Income Ratios than Conventional Loans

A borrower may be better off with an FHA loan over conventional financing if they have a high Debt To Income Ratio.

  • Conventional Loans typically require a borrower to have a Debt-to-Income (DTI) of 45% or less to qualify with a maximum DTI of 50%.
  • FHA is more flexible with higher debts allowing a maximum of 56.9%. Borrowers with higher debts may only qualify for FHA Loans.

FHA Streamline Refinance

If a borrower already has an FHA Loan but does not have a significant amount of equity in their home, they may qualify for a rate reduction through an FHA Streamline Refinance. This loan type may allow them to drop their rate and payments without an appraisal or documenting income and with little to no costs. This is a program unique to FHA financing and can help a borrower that purchased their home when their credit scores were lower but have since improved.

Summary of Why Conventional Loans are Better Than FHA Loans

With the current guidelines set by FHA, Fannie Mae and Freddie Mac, Conventional Loans may be a better fit for buyers than FHA loans. Conventional loans offer lower down payments of only 3% for first time homebuyers while FHA loans require 3.5% down. Mortgage insurance may be significantly cheaper on Conventional loans versus FHA loans. Lastly, submitting an offer with Conventional Financing may be more attractive to sellers over an FHA Pre-Approval.

To get more information on what loan type maybe the best fit for your situation, call a licensed loan officer today at 800-555-2098 or request information below.

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How to avoid or get rid of PMI

Private Mortgage Insurance (PMI) protects the lender in case you default on your loan. In most cases, unless you have a 20% down payment, you would have to pay PMI. But if that sounds like one more expense you can’t afford, here are some ways you can avoid PMI or get rid of it if you’re already paying for it.

Lender-paid PMI

The way PMI usually works is that you, the borrower, would have to pay an extra fee, along with your monthly mortgage. That extra fee can really squeeze your budget, especially if it’s already tight.

However, some lenders will offer to pay your PMI. Here’s how that works: They’d pay the full amount of the PMI up front, and you’d have to pay it back in the form of interest. It would slightly increase your mortgage rate, meaning that you’d have a higher monthly payment.

To figure out whether this is a good option for you, you’ll have to calculate whether the monthly cost of PMI would be more or less than the increase to your mortgage rate if your lender chooses to pay the PMI for you. Either way, the lender isn’t really paying it — you are. It’s just being distributed differently.

20% Down Payment on a Conventional Loan

The best, and most obvious, way to avoid PMI is to have a 20% down payment on a Conventional Loan. Since you’re putting down 20%, the lender wouldn’t need that extra protection against defaults. So you’d be in the clear.

However, if you couldn’t afford a 20% down payment and had to opt for an FHA Loan, for example, you could still get rid of your PMI once you reach 20% in home equity. Some types of loans have PMI attached to them for their entire lifespan, so in that case, you’d have to refinance to a Conventional Loan when you have 20% in home equity in order to drop the PMI.

VA Loans

If you are a veteran or are currently serving in the military, you are eligible for a VA Loan. The government created this loan program so that returning military members could purchase their own home with zero down payment, low monthly payments and more flexibility than traditional loans. The best part is, VA Loans require no PMI because the government provides a guaranty on the loan in case of default. So if you qualify, you can get a 15 or 30-year fixed VA Loan with zero down and no PMI.

The gift of equity

If you are purchasing your home from a family member, you can accept a gift of equity to lower the loan-to-value ratio. A gift of equity is when a family member sells you his or her house for a lower price than the listed price, and the difference can be used to make your down payment or pay off debt so you can qualify for the loan.

You can’t use a gift of equity on a VA Loan or Jumbo Loan. With an FHA Loan, you could also get a gift of equity from your in-laws or a non-profit organization. In any case, it must come with a letter that says it’s a gift.

For more information on avoiding PMI or getting rid of PMI on your existing loan, contact Riverbank Finance at (800) 555-2098 to schedule an appointment with one of our professional loan officers.

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How can I lower my monthly mortgage payments?

So, you’ve had a home for awhile, but you feel like your budget is just too tight. You scrimp and save, but it’s never enough. If the biggest expense you have is your mortgage, maybe it’s time to refinance your mortgage.

Refinance to a lower rate

Rates are very low. Right now, for a 30-year mortgage, the fixed rate can be as low as the high 3’s to low 4’s. Fifteen-year loans may even be in the high 2’s. Refinancing may be a great way to lower your overall mortgage payments by dropping your interest rate. This could help to save you thousands over the life of your loan. If your interest rate is over 4.5% now is a great time to review refinance options.

Drop your PMI

The only type of mortgage where Private Mortgage Insurance (PMI) drops off when you have 20% equity is the Conventional loan. Other types of loans, like the FHA, require PMI for the life of the loan. PMI usually costs 0.5 or 1% of the entire loan. It protects the bank from defaults. For you, it’s an extra cost — one that, once you’ve paid off 20% of the original loan value, you can refinance to remove. While it may not seem like a lot of money, 1% of a loan over the life of a 30-year mortgage can really add up over time. 

Extend your mortgage term

One reason folks often have trouble paying their monthly mortgage is that they think that a 15-year term is better than the 30-year. While it’s true that a 30-year mortgage takes longer to pay off, the monthly payments are lower. If your goal is a lower monthly budget, switching from a 15 to a 30-year will certainly do the trick. The only downside is the term of the loan is longer if you pay the minimum payments.

Also, if you already have a 30-year mortgage and refinance to a new one, you could still reduce your monthly payments.

Refinance from an FHA loan to a Conventional loan

You may have started with bad or low credit when you initially bought your house and had an FHA loan as the result. Or maybe you didn’t have enough money for a larger down payment. As your credit improves, you could have an opportunity to refinance your loan to a conventional mortgage. There are two advantages when refinancing an FHA to a Conventional loan: First, you could get rid of the Private Mortgage Insurance payments if you’ve paid 20% of the mortgage. Secondly, the interest rates for a Conventional loan may be lower than they are for FHA loans.

If you are thinking about refinancing your mortgage, contact one of our professional loan officers at 800-555-2098 to schedule an appointment. We can sit down and look at your financial situation and help you figure out the best way to lower your monthly mortgage payments.

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TIME IS RUNNING OUT ON REDUCED MORTGAGE INSURANCE PREMIUMS

No April fools!  FHA MIP going up April 1st!

FHA loan are becoming more popular as families deal with the after effects of the major economic depression that we saw only a few years ago.  With conventional mortgage being more difficult to qualify for with previous credit issue, FHA has become the go to mortgage program for U.S. Families.

The Federal Housing Administration has experienced high delinquency rates throughout the past couple of years also. With the uptick in foreclosures and partial claim premiums from buyers not able to pay their payments on time, the administration is forced to again raise mortgage insurance premiums.

Related: FHA MORTGAGE INSURANCE PREMIUMS GOING UP SOON!

FHA Mortgage Insurance Premium Increases

The Federal Housing Administration (FHA) does not offer financing directly. Their role in mortgage lending is to insure private companies against losses. When a bank or mortgage company offer FHA financing they are using the administrations underwriting guidelines to pre-qualify and approve clients. If the borrower qualifies under such guidelines then the FHA will insure the lender against losses.

With billions of dollars of mortgage loans insured the FHA has a large responsibility to remain solvent and protect itself against future losses therefore it has an account called the Mutual Mortgage Insurance (MMI) fund.  This fund is regulated by law and the FHA is required to maintain a 2% minimum reserve.

The FHA has dropped below their minimum requirements therefore they turn to new borrowers to cough up the coins to replenish it.  The Federal Housing Administration has announced that it will be increasing Mortgage Insurance Premiums in the near future.

2013 Mortgage Insurance Premiums for FHA Loans

Starting April 1st, 2013, FHA mortgage insurance premiums (MIP) will increase 10 basis points annually of .10 percentage points. This increase in premiums will apply to all FHA loan terms including the 15-year-fixed-rate FHA loans.

FHA Streamline Refinance MIP

If your current loan is an FHA loan in which you took out prior to June 1st, 2009 then you may be in luck. The administration has allowed a lower premium amount for homeowners refinancing to lower their payments through a FHA streamline refinance mortgage.

FHA Streamline Refinance Mortgage insurance premiums will remain at.55 basis points or .0055 percentage points annually. The added bonus is that the up-front mortgage insurance premium will be only .01 basis points or .0001 percentage points.

Updates for Cancelling FHA Mortgage Insurance Premiums

Starting June 3rd, 2013 the FHA has announced that it will no longer allow MIP cancellation if the loan balance is higher than 90% of the home’s appraised value (>90% LTV). Currently homeowners are able to request cancellation of their monthly mortgage insurance once their loan balance reaches 78 percent of the home’s original appraised value when the loan was taken out.

For those homeowners whom are disciplined enough to have a 10% down payment and start of at 90% LTV or less, the mortgage insurance will continue for a minimum of 11 years.  This chance starts mid-2013 and will have sweeping effects to the mortgage industry

How to Apply for an FHA mortgage

Despite the additional mortgage insurance premiums , FHA mortgage loans may still be the best option for a home purchase or refinance.  Conventional loans still require a minimum of 7 years to have passed after a foreclosures while FHA may allow only 3 years after the sale date.  This factor alone still has clients flocking towards FHA loans.

To check your FHA eligibility, and how the agency’s new rules may affect your finances, get started with a rate quote online or by calling the mortgage experts at Riverbank Finance today. If you get started before the April 1, 2013 deadline, you’ll be “grandfathered” in to the current, lower MIP rates.

Request Information Now!