3% Down Conventional Mortgage Loans Are For Real

Mark Greene Personal Finance Contributor | Forbes

First time home buyers can put as little as 3% down and get conventional financing (no longer confined to the FHA only box). And there are no prohibitive restrictions; in fact if two people are buying a home, only one of them need be a first time buyer.


Standard FannieMae underwriting guidelines and standard PMI coverage and costs apply. There is no catch.


This is a significant mortgage financing tool that will help first time buyers move into the active home buyers’ pool.


The limited-down-payment-first-time-home-buyer market has always been the domain of FHA financing as the primary option and this market segment has historically been sorely underserved. But FHA mortgage insurance (MIP) costs have become prohibitively expensive (and permanent), and for many first time buyers the economics just didn’t work.


Consumers began to step back and endeavor to assemble more down payment money and stronger qualifying virtues in the hope of securing 5% down payment conventional financing.

Enter 3% down payment conventional mortgage financing and everything changes.


To be clear, FHA underwriting guidelines are a little more forgiving about past credit misdeeds and they do allow for stretching income to qualify more than conventional underwriting might. The price you pay for that is more expensive and forever mortgage insurance.


Conventional financing may require a stronger credit history and a stronger overall borrower profile but the chasm that once separated these two distinctive mortgage financing options has narrowed.


And conventional financing does not handcuff borrowers to mortgage insurance forever like FHA mortgage insurance does. Once equity targets (20% - 22%) are reached, current appraisal supported value can eliminate conventional PMI (Private Mortgage Insurance).

Not so with FHA mortgage insurance (MIP), once you get it, the only way to get rid of it is to refinance out of the FHA loan or sell your house!


And let us not forget that FHA mortgage insurance (MIP) has an upfront premium as well as the monthly premium that is part of your mortgage payment! In fact, it is 1.75% of the loan amount that is added to your loan! So a $200,000 FHA loan would actually start at $203,500 ($3,500 for the upfront MIP). I did not make that up, go look it up for yourself!

By the way, conventional low down payment financing has no upfront mortgage insurance premium (PMI). Never has.


If you were a first time home buyer with limited funds for a down payment, decent credit and qualifying cred, which would you choose?


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