FHA rules allow borrowers to use the FHA streamline if they have a second mortgage, home equity line (HELOC), or home equity loan. However, there are limitations. The maximum loan amount of the first and second mortgage combined can be no more than 125% of the property’s current value.

Compare that with the standard FHA streamline rule, which states a borrower can refinance no matter how much their loan amount exceeds the home’s value.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

Can you get an FHA streamline refinance when you have a second mortgage?

If a borrower has a $200,000 FHA loan and a second mortgage, the first loan may still be eligible for a streamline up to 125 percent of the original purchase price. Using this same example, the second mortgage may be as high as $50,000 while the FHA first mortgage is still streamline refinance eligible.

If the second mortgage causes the CLTV to exceed 125 percent, the mortgage must be paid down in order for a borrower to successfully close an FHA streamline refinance.

What if the second mortgage exceeds limits?

Keep in mind that the FHA streamline refinance can’t pay down or pay off the second mortgage. The second mortgage holder will have to subordinate the loan. This means that the lender will request a document from the lender stating that the second mortgage or HELOC will be in second position behind the new FHA first mortgage.

“Second position” simply means the order in which the loan will be paid off in case of foreclosure. If the borrower fails to pay the mortgage and the home is foreclosed on, the bank will pay off the primary mortgage first. In these situations, second mortgages often don’t get paid off.

The higher risk contributes to higher rates for second mortgages. They are viewed as higher risk. Conversely, first mortgages typically come with low fixed rate, since they are the first to be repaid in a foreclosure or short sale situation.

Why is this important? The first mortgage lender, in this case FHA, needs their loan to be in first position to give you the best available rate on the FHA streamline.

Check today's FHA streamline refinance rates (Sep 16th, 2024)

Subordination issues

Typically, second mortgage lenders will comply with the subordination request. But there have been instances where they refuse to subordinate. It is within their right to deny a subordination request. However, you can help the success of the process.

Typically your refinance lender will request the subordination from the second mortgage holder. The second mortgage lender or servicer will sometimes issue a subordination denial to a third party, i.e. your refinance lender. But as the customer, you may have better luck pushing your subordination request through. Ask your refinancing lender for your second mortgage holder’s subordination department contact information.

Successful FHA refinancing with a second mortgage

Performing an FHA streamline while you have a second mortgage on your home is a little more complicated, but it can be done. With the right FHA lender and a bit of extra effort, homeowners can drop their mortgage payment even under these circumstances.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

The post Get an FHA Streamline Even if You Have a Second Mortgage first appeared on My Mortgage Insider.

A conventional refinance is one of the most versatile loans in today’s market.

Conventional refinances can convert any type of mortgage loan into a conventional loan. Simultaneously, a conventional refi could also cash out equity.

In many areas, home prices increased over the past few years. As a result, many homeowners are eligible for a conventional refinance and could even cancel PMI to further lower their costs.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

In this article:

What is a conventional refinance?
What can a conventional refinance be used for?
Conventional refinance requirements 2022
Refinancing an FHA loan into a conventional loan
Getting rid of mortgage insurance with a conventional refi
Conventional refinance rates
Conventional loan limits
Conventional refinance loan lengths
Are adjustable-rate refinances available?
Do conventional refinances require closing costs?
Conventional refinance FAQ
Our recommended refinance lenders

What is a conventional refinance?

Conventional refinances are conventional loans that replace an existing mortgage loan. The refinance replaces the old loan by paying it off. Then, the homeowner starts making payments on the refinance loan instead of the original loan.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

The new loan should benefit the borrower in some way: a lower interest rate, a shorter loan term, a fixed-rate loan, or cash back from equity, for example.

Like conventional loans, a conventional refinance is not insured by a federal agency. So borrowers rely more on their credit score and debt-to-income ratio to qualify.

The most qualified borrowers get the best deal on conventional refinance loans.

What can a conventional refinance be used for?

Conventional refinances can help you meet a variety of goals:

• Refinancing a primary residence, second home, or investment property
• Turning home equity into cash at closing
• Eliminating private mortgage insurance (PMI)
• Canceling FHA mortgage insurance
• Refinancing out of any other loan type
• Reimbursing a cash home purchase
• Shortening the home loan term

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Ideally, a conventional mortgage refinance will achieve two or more of these goals at once.

For example, a conventional refi could replace an existing FHA loan, eliminating the FHA’s mortgage insurance premium, while also generating cash back at closing and shortening the loan term.

But meeting at least one goal is good enough for most borrowers.

Conventional refinance requirements 2024

Qualifying for a rate-and-term conventional refinance will resemble qualifying for a conventional purchase loan. Rate-and-term loans simply replace an existing mortgage with a new loan.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

To be eligible for a conventional refinance, you’ll need to have sufficient loan-to value (LTV). Many conventional programs will allow you to refinance if you have at least 5% equity — though if you have an LTV of 20% or more then refinancing could also enable you to eliminate any private mortgage insurance (PMI) you might be paying.

Along with meeting LTV, you’ll need to have a FICO score of 620 with most lenders and a debt-to-income ratio below 43%. You’ll also need to document your income by sharing a W2, pay stub, or tax returns.

Conventional cash-out refinance requirements

A conventional cash-out refinance allows you to borrow against your home equity, generating “cash back” which you could use for debt consolidation, home improvements, or any other purpose.

A cash-out refi can’t access all of a home’s equity. Borrowers have to follow the 80% LTV rule which requires leaving 20% of the equity untouched.

Check your eligibility for a conventional cash-out refinance. Start here (Sep 16th, 2024)

So if you owned a home worth $250,000, your maximum loan size would be $200,000.

If you’ve paid down your existing mortgage to a balance of $150,000, a $200,000 loan would be large enough to pay off your existing loan while also paying you up to $50,000 at closing.

But if your current loan balance was $200,000, you wouldn’t have enough equity to get cash back, even though you have $50,000, or 20%, in equity. That 20% equity has to stay in the home.

Many lenders require higher credit scores for cash-out refinance options. Some look for 660 or 640 scores instead of only 620. Interest rates also tend to be a little higher for cash-out refinances compared to rate-and-term refinances.

Refinancing an FHA loan into a conventional loan

First-time home buyers — and other buyers with lower down payments and average credit scores — might need an FHA loan to buy a home.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

But FHA borrowers pay FHA insurance. This FHA mortgage insurance premium (MIP) adds 1.75% of the loan amount upfront. Then, most borrowers pay another 0.85% of the loan’s amount each year in MIP.

Refinancing to a conventional loan can enable FHA borrowers to eliminate mortgage insurance premiums.

Conventional refinances eliminate FHA MIP

For most current FHA loan holders, the best way to stop paying MIP is to refinance their FHA loan into a conventional loan, exiting the FHA loan program altogether.

Check your eligibility to eliminate FHA MIP. Start here (Sep 16th, 2024)

As long as the FHA homeowner has at least 20% equity — and can meet a conventional lender’s credit and debt-to-income ratio rules — the new conventional refi won’t need any mortgage insurance.

Of course, the homeowner should make sure the new loan will actually save money compared to the existing FHA loan. A borrower who barely qualifies for a conventional loan may not see much, if any, savings. In fact, a refinance might cost more.

To find out for sure, get a mortgage preapproval from a few different lenders. Preapprovals show your monthly mortgage payments and long-term costs.

Getting rid of mortgage insurance with a conventional refi

Conventional loans charge monthly mortgage insurance, too. When home buyers make down payments less than 20%, lenders require private mortgage insurance, or PMI.

Verify your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

PMI rates vary by borrower. They usually range from 0.5% to 1.5% of the loan amount per year. For a $250,000 loan, a 1% PMI rate would cost $2,500 a year, or about $208 a month.

The good news is that you won’t have to refinance out of this extra cost. Once your loan balance falls to 80% of your home value, you can cancel PMI and stop paying for it.

Federal law requires your lender to cancel PMI once your loan balance falls to 78% LTV. If you think you’ve already met this requirement but your lender disagrees, check with your loan servicer about getting a new home appraisal.

Can I refinance out of PMI?

Conventional borrowers who want to get rid of PMI sooner by refinancing have a couple of loan options:

• Refinancing into loans that don’t require PMI: Some lenders offer private, in-house loan programs that don’t charge PMI. But these loans usually charge higher interest rates. So the savings might be minimal or nonexistent.
• Cash-in refinancing: Bringing cash to closing could drop a home’s LTV low enough to eliminate PMI. But there are closing costs to pay, and they cut into the savings. Plus, you might have to part with a lot of cash.

Most conventional loan holders will find it’s best to wait. When they’ve paid their loan down to 80% LTV, they can cancel PMI without paying closing costs or higher rates.

Conventional loan refinance rates

Almost every refinance shopper will get a different rate based on their financial situation.

For instance, a customer refinancing a rental property will get a rate that’s up to 0.5% higher than someone who is refinancing a single-family primary residence.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Likewise, someone with a 660 score will pay about 0.25% more than a customer with a 700 score.

In short, conventional loan refinance rates are based on risk to the lender.

Unlike federally insured loans, which insulate borrowers from the effects of this risk, you’ll get the best conventional refinance rate by being a low-risk borrower.

Lower-risk borrowers can refinance into rates that are below today’s average mortgage rates. And since a refi with 80% LTV requires no private mortgage insurance, a conventional refi’s APR will be lower, too.

Connect with a lender to start your conventional refinance application (Sep 16th, 2024)

2024 conventional loan limits

The standard conventional loan limit is $766,550. A qualifying refinance applicant can open a loan for at least this amount anywhere in the country.

But Fannie Mae and Freddie Mac allow higher limits in some areas where real estate costs more.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

For instance, San Diego has a conventional loan limit of $1,149,825. Refinance consumers in Seattle and Queens, New York, can also be approved for a higher conventional loan.

The highest limit in the country is available in Honolulu, Hawaii, which is even higher than the limit in San Diego.

Homeowners in areas with high housing costs should check their conventional loan limit before they assume they need a jumbo loan.

Homeowners who refinance multi-unit homes have access to higher loan limits:

• The conventional loan limit for a 1-unit home: $766,550
• The conventional loan limit for a 2-unit home: $981,500
• The conventional loan limit for a 3-unit home: $1,186,350
• The conventional loan limit for a 4-unit home: $1,474,400

Homeowners with multi-unit homes that are also in high-cost areas can receive conventional loans of over $1.2 million.

Keep in mind that these are loan limits, not home price limits. Someone refinancing a $2 million home could receive a conventional loan of $766,550 in any area of the country.

What conventional refinance loan lengths are available?

The most popular conventional refinance loan terms are 15 and 30 years.

A 15-year fixed-rate mortgage will require higher monthly mortgage payments compared to a 30-year fixed loan. But long-term interest charges will be lower with a 15-year term.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Borrowers can also find 10- and 20-year mortgages, though they are less common. Some lenders will customize a conventional refinance’s term.

In general, longer terms make for lower payments but more interest.

Check your mortgage rates. Get started here

Are adjustable-rate mortgages available?

Yes, borrowers can refinance into an adjustable-rate mortgage (ARM). These loans have fixed rates for the first three, five, seven, or 10 years.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

During this initial fixed period, the rate is typically lower than the rate you could get on a 30-year fixed-rate loan. After the intro rate expires, rates and payments can change each year.

ARMs are great for homeowners who plan to move, refinance again, or pay off their mortgage in a few years.

Do conventional refinances require closing costs?

Just like home purchase loans, refinance loans charge closing costs. These costs include loan origination fees and legal fees. Closing costs could also include a home appraisal fee and prorated property taxes and homeowners insurance premiums.

Check your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

Closing costs usually range from 2% to 5% of the loan amount. That’s $2,000 to $5,000 for every $100,000 borrowed.

Some lenders advertise no-closing-cost loans. These loans normally charge higher interest rates which reimburse the lender for your closing costs.

How do I get a conventional cash-out refinance?

A cash-out refinance pays the borrower cash at closing. The cash out is borrowed from the home’s equity and must be repaid as part of the new loan’s monthly mortgage payments.

Here’s how it works: If a homeowner owes $100,000 on a home that’s worth $200,000, the homeowner can apply for a loan amount bigger than what they owe. The difference between the two loans goes to the homeowner.

Most lenders can approve a cash-out loan up to 80% loan-to-value ratio. So a homeowner who has 30% equity can take up to 10% of the home’s value in cash with a cash-out refinance.

Cash-out refinance rates are slightly higher than no-cash-out loans. The difference is usually about 0.125% — or about $10 more per month in interest for every $100,000 borrowed.

Considering the relatively low cost, a cash-out loan can be a great way to consolidate high-interest debt and get monthly expenses under control. For many households with a lot of debt from student loans, credit cards, and car loans, a cash-out loan may reduce payments by many hundreds of dollars per month.

Check your cash-out refinance rates. Start here (Sep 16th, 2024)

Conventional refinance FAQ

Do I need to have a conventional loan to do a conventional refinance?

No. You can refinance any type of loan with a conventional loan. You can refinance FHA loans, USDA mortgages, Alt-A loans, subprime loans, option ARMs, and adjustable-rate mortgages.

My appraisal shows a lower value than expected. Can I still refinance with a conventional loan?

Possibly, but the refinance may require monthly mortgage insurance. It’s best to have 20% equity in your home before refinancing with a conventional loan.

I’m not sure about my credit. Should I apply for an FHA loan first?

You don’t have to pick one loan program when applying for a new loan. Your loan officer will look at your entire situation and try for the lowest-cost option. If a conventional loan doesn’t work out, the lender may switch you to an FHA loan. Don’t automatically rule out a conventional loan just because of your credit standing.

Can I refinance from an FHA to a conventional loan?

Yes. If you have sufficient equity and a credit score of 620 or higher, you can likely refinance to a conventional loan.

Why get a conventional loan? Why not refinance with FHA?

FHA can be used to refinance, but it’s typically for homeowners who can’t qualify for a conventional refinance due to past credit issues. Because of its flexibility, an FHA refinance is more expensive. Homeowners who don’t need the FHA’s flexibility can save money with conventional refinancing.

How do I apply for a conventional loan refinance?

Applying for a conventional refinance is just like applying for any other refinance.

Start by checking rates here. The lender will guide you through the rest of the process.

What is a conventional refinance?

A conventional refinance is a new conventional loan that replaces an existing mortgage on a house you’ve already bought. Unlike an FHA Streamline Refinance, which can be used only if you already have an FHA loan, a conventional refinance can replace any other mortgage type.

Can you refinance a conventional loan?

Yes, homeowners can refinance their conventional loans. Refinance loans are worth the time and money when they achieve a goal such as lowering your mortgage rate or monthly payments.

How soon can I refinance an FHA loan to a conventional loan?

FHA borrowers can refinance into conventional loans as soon as they have 20% equity in their home and a credit score of at least 620. Conventional lenders usually look for debt-to-income ratios of 43% or lower. These standards are stricter than FHA loan requirements.

How soon can you refinance a conventional loan?

There’s no waiting period for refinancing a conventional loan. However, it’s often best to wait until you have 20% equity in the home. If you made a 20% down payment, you should already have 20% equity.

Can you refinance an FHA loan to a conventional loan?

Yes, conventional refinances can replace loans of any type, including FHA, USDA, and VA loans.

Is a conventional refinance better than an FHA Streamline Refinance?

Not necessarily. But FHA Streamline Refinances work only for current FHA loan holders. They’re a great way to save money without going through the full credit underwriting process. Unless you have an FHA loan now, you couldn’t get an FHA Streamline Refi.

Can I get a conventional adjustable-rate refinance?

Yes, and these loans are becoming more popular as mortgage rates have bounced back from the historic lows of the pandemic. ARMs are more popular because they start out with a lower-than-average mortgage rate. Later, the rate will fluctuate with the market.

How much equity do I need to refinance to a conventional loan?

It’s possible to refinance a conventional loan with as little as 3% home equity. However, it may be best to aim for 20% equity before a conventional refinance. This would help you qualify for a lower mortgage interest rate and cancel private mortgage insurance, further reducing your monthly payments.

How do you qualify for a conventional refinance?

Conventional borrowers typically need FICO credit scores of at least 620, a debt-to-income n caratio no higher than 43%, and at least 20% in home equity. If you meet these requirements, shop around with at least three mortgage lenders so you can compare rates.

What does ‘conventional’ mean?

Conventional mortgages are home loans that are regulated by Fannie Mae and Freddie Mac. These two companies buy most conventional loans from lenders. Since they control the mortgage market, they make the rules for what qualifies as a conventional loan — also known as a conforming loan. Most home buyers use conforming loans.

Get started on your conventional refinance now

Not sure where to start with your conventional refinance?

A mortgage preapproval is a great place to begin. The preapproval process requires a soft credit check which won’t hurt your score.

It’ll show what rates you qualify for and how much you could save.

Connect with a lender to start your conventional refinance application (Sep 16th, 2024)

The post Conventional Refinance | Rates, 2024 Loan Limits & Guidelines first appeared on My Mortgage Insider.

The proposed $25,000 First-Time Buyer Home Act would help prospective home buyers purchase a home by helping them to fund a down payment.

The Act was originally introduced in 2021. It is still in the current administration’s budget proposal, however, it has not been enacted yet. That means it might undergo changes before becoming law, or it might not ever become law.

Still, here’s what we know about the $25,000 Downpayment Toward Equity Act as it stands right now.

Check your home buying eligibility. Start here (Sep 16th, 2024)

What is the Downpayment Toward Equity Act?

The Downpayment Toward Equity Act of 2023 is designed to help “close the U.S. racial wealth and homeownership gaps by providing $100 billion in direct assistance to help first-time, first-generation homebuyers purchase their first home.”

If the program became law, financial assistance for qualifying prospective homeowners could include “assistance for down payments, closing costs, and to help buy down mortgage interest rates.” The assistance could total up to $25,000 per prospective home buyer.

The available information on the proposed act indicates the home buyer would receive the grant upfront, instead of as a tax credit. Since the grant proceeds would be awarded on closing, a mortgage lender may use this information as a part of their decision-making process for the mortgage loan.

Did the $25,000 first-time home buyer grant get passed?

As of January 2024, the Down Payment Toward Equity Act has not been passed. The bill was initially introduced in 2021 in the Senate. It is currently being considered by Congress, with no clear indication of how long it might take to become law.

However, in March 2023, the White House included this grant in its proposed budget for the fiscal year 2024. The budget allocated $10 billion for grants to benefit qualified first-time home buyers.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Who qualifies for the Down Payment Toward Equity program?

The Down Payment Toward Equity program is designed to help first-time, first-generation buyers purchase their first home. Given that, not everyone qualifies for this proposed grant.

If the Act passed in its current state, prospective homeowners would need to meet the following criteria to receive a grant:

• First-time buyers: To be considered a first-time home buyer, a borrower must not have owned a home for the last three years. This means prospective homeowners who sold their last place over three years ago without purchasing another property could qualify for this grant.
• First-generation homebuyers: The grant funds are specifically designed for home buyers whose parents’ never owned a home in the United States. If the home buyer lived in foster care, this requirement is waived. Also, this requirement is waived if the borrower’s parents default on a home loan and experience foreclosure.
• Income requirements: The program is intended for low-income and moderate-income borrowers. Prospective homebuyers must typically have a household income of less than 120% of the area’s median income. In high-cost-of-living areas, the income limits are higher and the borrower can earn up to 180% of the area’s median income and still qualify.
• Residency requirements: Borrowers who plan to use the grant funds to purchase a home must live in the home for at least five years. If the homeowner sells the home before the five-year mark, they will need to repay the grant funds.
• Property requirements: This down payment grant program is only available for real estate properties of one to four units. To purchase a multi-unit property, the homeowner must utilize at least one of the units as a primary residence.
• Housing counseling: A prospective borrower must take a homeownership education course that is approved by the Department of Housing and Urban Development (HUD) before receiving any funds.

Additional funds could be available for some borrowers

Eligible home buyers could receive up to $20,000 in grant funds for their new home purchase. Some specific borrowers may even qualify for extra money, up to $25,000 in grant funding.

To qualify, borrowers must make less than 120% of the area’s median income, or belong to a group that has been subject to racial or ethnic discrimination within the U.S.

Other down payment assistance programs for first-time homebuyers

The Down Payment Toward Equity Act hasn’t been passed yet. If the bill becomes law, it could provide a pathway to homeownership for many aspiring homeowners.

But if this bill doesn’t become law or you just don’t want to wait, there are other down payment assistance (DPA) program opportunities that could make homeownership possible.

Here are a few other first-time homebuyer programs available to first-time home buyers:

• Localized grants from government agencies: Some cities and states offer down payment assistance grant money for first-time home buyers.
• Forgivable loans: Some down payment assistance programs are available as forgivable loans, which means you’ll find a 0% interest rate, the balance is forgiven after a set period of time and no repayment is required.
• Government programs: The FHA loan program and USDA loan programs can offer flexible credit score requirements and low down payment options.

Take some time to explore all of your down payment assistance options as you begin your homeownership journey. If you meet the eligibility requirements, you could move forward with the home-buying process soon.

Check your FHA eligibility. Start here (Sep 16th, 2024)

$25,000 first-time home buyer grant FAQ

What is Biden’s $25,000 Down Payment Toward Equity Act?

Biden’s Down Payment Toward Equity Act is a down payment grant that offers a pathway to homeownership for first-generation home buyers. If the bill becomes law, qualified home buyers could receive up to $25,000 in grant funding for their home purchase.

Is Biden giving $25,000 to first-time home buyers?

The Biden administration included grants to first-generation, first-time home buyers in its proposed budget for the fiscal year 2024. It’s possible this cash grant program was included to make good on a campaign promise in a tight housing market with high rates. But the bill hasn’t become law yet, which means President Biden isn’t giving $25,000 to first-time home buyers as of writing.

Who qualifies as a first-time home buyer?

For the purposes of this program, a first-time home buyer is someone who hasn’t owned a home in the last three years.

When will the Downpayment Toward Equity Act pass?

Right now, there is no definitive indication about when — or if — the Downpayment Toward Equity Act will pass.

The bottom line

The Down Payment Toward Equity Act could offer a path to homeownership for many Americans. However, this bill isn’t the law yet. With that, prospective beneficiaries of the program will have to wait and see if the proposal becomes law.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post $25,000 Downpayment Toward Equity Act | What To Know first appeared on My Mortgage Insider.

A piggyback loan is a way to save money by using two mortgage loans, instead of one loan, to buy a house.

Why use a second loan when one is all you really need? Because the second mortgage covers part of the down payment for the first mortgage, meaning you can reap the benefits that come with making a larger down payment.

By increasing the down payment amount, the borrower can save money. For example, paying 20% down eliminates the need for private mortgage insurance premiums.

How do piggyback loans work?

Piggyback loans are also called 80/10/10 loans, and if you’re wondering how these loans work, all you have to do is follow the numbers:

• 80: Represents the first mortgage, which finances 80% of the home’s purchase price.
• 10: Represents the second mortgage, which finances another 10% of the home’s price. This 10% counts toward the buyer’s down payment.
• 10: Represents the cash down payment provided by the buyer.

With this scenario, a buyer can benefit from a 20% down payment while paying only 10% down out of their own pocket.

There are other types of piggyback mortgages besides 80/10/10s, such as an 80/5/15, and 75/15/10. The second number always describes the second mortgage, and the third number describes the buyer’s cash down payment.

The second loan is often a home equity line of credit (HELOC), or home equity loan.

Are 80/10/10 loans available?

Many mortgage lenders offer piggyback financing in 2024.

Lenders have always offered the first mortgage — the 80% portion of the home’s purchase price. In the past, it was harder to find a lender for the 10% second mortgage.

Due to the popularity of the program, many lenders have created their own second mortgage program. Some lenders have also built relationships with other lenders to secure second mortgage financing for the home buyer — making it one seamless transaction as far as the buyer is concerned.

How do piggyback loans eliminate PMI?

Normally, private mortgage insurance, or PMI, is required when borrowers pay less than 20% down on a conventional loan.

With a piggyback loan, however, borrowers can put only 10% down but still get credit for a 20% down payment. The second mortgage provides the other 10% of the 20% down payment amount.

Why get two loans just to avoid PMI? Because PMI costs borrowers money, and the premiums protect the lender — not the borrower.

The PMI price tag varies by borrower. Annual premiums usually range from 0.5% to 1.5% of the primary mortgage amount each year. On a $300,000 first mortgage, 1% would equal $3,000 a year or $250 a month.

Other benefits of a piggyback mortgage loan

Eliminating PMI isn’t the only reason buyers like piggyback loans. This financing strategy can also:

• Help lower interest rates: A bigger down payment lowers the primary mortgage’s loan-to-value ratio (LTV), and a lower LTV will often help buyers dodge higher interest rates
• Keep loan within limits: Freddie Mac and Fannie Mae set conforming loan limits each year. A bigger down payment could keep your loan amount within this year’s limit, avoiding a non-conforming jumbo loan
• Save cash for closing costs: Even if you could afford a 20% cash down payment, parting with only 10% can leave room in the budget for closing costs, moving expenses, or new furniture
• Help you buy a new home while selling your old one: Some buyers pay off their piggyback’s second mortgage quickly — after selling another home, for example. They use piggybacking so they can buy with 20% down before selling their other home

A lot of interrelated factors will affect your home-buying budget. By increasing your down payment, piggyback loans can move more of these factors in your favor.

Types of piggyback loans

80/10/10 loans are the most common type of piggyback loan, but they aren’t the only type. Buyers can also find:

• 80/15/5 piggyback loans: This version shifts more of the financing burden onto the second loan, allowing buyers to bring only 5% to the closing table
• 75/15/10 piggyback loans: This piggyback loan increases the second mortgage by 5% so the buyer can put 25% down on the primary mortgage

As you can see by the numbers, these variations divide the home’s cost between the two mortgages differently. Otherwise, they work like any other piggyback loan: A second mortgage helps cover the down payment on the first mortgage.

80/10/10 vs 75/15/10

A piggyback loan’s variations aren’t random. There’s usually a reason behind the size of each loan.

For example, some homes — such as condominiums — may need a 25% down payment instead of 20% down. In that case, a 75/15/10 piggyback would be the way to go. This scenario could help with some investment property down payments, too.

For most single-family home buyers, an 80/10/10 piggyback offers just enough down payment support.

How to qualify for a piggyback loan

Compared to conventional loans with all-cash down payments, piggyback financing will require a higher credit score. That’s because you have to qualify for a second mortgage (a home equity loan or HELOC) on top of your primary mortgage.

Many lenders look for scores of 680 or higher for a second mortgage. That’s 60 points higher than the typical 620 score needed for a conventional loan.

Another qualifying factor for piggyback financing is debt-to-income ratio, or DTI. The payment amount for both loans — the primary mortgage and the second mortgage — will be factored into your DTI. DTI also includes your credit card minimum payments, auto loans, and student loan payments.

All these monthly debts, including your two house payments, can’t exceed 43% of your monthly gross income for most lenders.

Alternatives to a piggyback loan

If a piggyback loan’s credit score and DTI requirements won’t work for you, consider one of these alternatives:

• 10% down conventional loan: Buyers don’t need 20% down to get a conventional loan. Even with 10% down, you could get a competitive interest rate. You’d pay PMI but only until you’ve paid the loan down to 80% of the home’s value
• FHA loan with 10% down: FHA loans let buyers with average credit and lower down payments access lower interest rates. With 10% down, you can stop paying the FHA’s mortgage insurance premiums (MIP) in 11 years

Some buyers can also get USDA loans or VA loans which require no money down, but not everyone is eligible. USDA loans have income and geographical limits; VA loans are reserved for military service members.

Is an 80/10/10 less expensive than an FHA loan?

The minimum down payment for an FHA mortgage is just 3.5%. However, buyers can make a bigger down payment if they wish, and a 10% down payment on an FHA loan can save money in the long run.

If you have 10% to put down, should you use an FHA loan instead of piggybacking?

Before deciding, consider the FHA’s mortgage insurance premium (MIP), which charges 0.8% of the loan amount each year on a 10% down loan. For a $350,000 home, that’s $210 per month.

The MIP is required for the first 11 years of the loan with a down payment of 10%. With a smaller down payment, MIP is required for the life of the loan.

In addition to this monthly mortgage insurance cost, FHA charges a one-time upfront mortgage insurance premium of 1.75% of the loan amount. These closing costs can add up and make a piggyback mortgage cheaper than FHA.

But mortgage lending is personal. What’s true for most borrowers isn’t true for all borrowers. Some borrowers can save with an FHA loan, especially if their credit score is borderline — just high enough to qualify for piggyback financing.

The best way to find out for sure? Compare preapproval offers from several lenders to see which type of financing is most affordable for you.

Piggyback loans vs PMI vs FHA loans

If you’re making a cash down payment of less than 20%, you might be looking at three popular loan options: a piggyback loan, a conventional loan with private mortgage insurance (PMI), or an FHA loan with mortgage insurance premiums (MIP).

In a three-way match-up, which mortgage product comes out on top? Let’s look at an example of a home purchase of $350,000 with 10% cash available to put down.

*Rates are only examples and are not taken from current rate sheets. Your rate may be higher or lower. Click here to request current rates.

In this scenario, the piggyback mortgage saved the buyer $113 per month compared to a conventional or FHA loan.

Again, your actual experience will depend on the rates you qualify for based on your credit score, debt-to-income ratio, and income level. Your mortgage lender can help you run the numbers and compare costs for each option.

Why doesn’t everyone do a piggyback loan?

In the scenario above, the piggyback mortgage is the clear winner in terms of monthly payments. However, this loan program may not be for everyone. There are a few factors to bear in mind when making this financial decision:

• Piggyback mortgages often require a high credit score. You probably need a 680 score to qualify, but that will vary with each lender. Borrowers with a less-than-perfect credit score, an irregular income history or who are using a gift for the 10% down payment will probably need FHA or conventional financing.
• Piggyback loans may be harder to refinance later. Before refinancing, the second mortgage would need to be paid off or subordinated. To subordinate the second mortgage, the refinance lender would need to agree to make their loan second in importance behind the new first mortgage. In some cases, this agreement can be hard to get, making refinancing more difficult.
• There is no Streamline Refinance option for piggyback mortgages. Expect longer refinance times compared to an FHA refinance.
• The second mortgage rate is often variable and based on the current prime rate. As rates rise, so will the second loan’s payments.
• The second mortgage is often referred to as a HELOC, or home equity line of credit. Some HELOC second mortgages require only interest to be paid each month. So in five or ten years, the balance will be the same if the borrower does not make additional principal payments.
• Each loan will likely have its own terms, requirements and rules. You should be prepared to supply documentation for two separate loans as the 80% first mortgage and 10% second mortgage are often placed with two separate lenders, each with its own rules.

Piggyback loan pros and cons

Pros of piggyback loans

• Lowers monthly payments for many home buyers
• Avoids PMI with only 10% cash down payment
• Can get a primary mortgage within conforming loan limits

Cons of piggyback loans

• Second lien on the home from day one
• Second loan often has a variable rate
• Requires a higher credit score

Piggyback loan FAQs

What is a piggyback loan?

With piggyback loans, home buyers can use a second mortgage loan to boost the down payment on their first, or primary mortgage loan. For example, a buyer could bring a 10% cash down payment and use a second mortgage to generate cash for another 10% down. The combined 20% down payment avoids PMI.

What is the advantage of a piggyback loan?

Because they simulate a 20% down payment conventional loan, piggyback loans eliminate the need for private mortgage insurance. The bigger down payment can also keep the primary mortgage within conventional mortgage limits, eliminating the need for a jumbo mortgage on high-value real estate.

How does a piggyback mortgage work?

A piggyback loan is two mortgages: A conventional mortgage that’s normally a fixed-rate loan and a second mortgage that’s often an interest-only home equity line of credit. The second loan provides part of the down payment on the first loan.

Is it hard to get a piggyback loan?

It’s gotten easier to find lenders who allow piggyback loans. Borrowers need higher credit scores — usually FICO scores of 680 or higher — to get approval. Both loan amounts must fit within the borrower’s debt-to-income ratio, or DTI.

Are piggyback loans still available?

Yes. In fact, they’re easier to find since they’re in high demand. Some lenders will offer both mortgage loans. Others will recommend lenders for the second mortgage.

Piggyback or traditional? Which loan is right for you?

Home buyers need to make their own decisions about which loan type is best based on factors like future financial goals, credit score, home price, and their down payment. A loan officer can help you determine the best fit for your financial situation.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post Piggyback Loan (80/10/10 Mortgage) | Rates & Requirements 2024 first appeared on My Mortgage Insider.

Of course, everyone wants a clear answer. But the reality is that it’s not so cut and dry.

Some believe that the high interest rates are a good enough reason to put off a home purchase for now. But others think that the ease of buyer competition could make it the perfect time to find the home of your dreams.

Housing market: A current look

At the macroeconomic level, most prospective home buyers are aware that mortgage rates have increased dramatically in recent years.

Although average mortgage rates have started to dip after hitting a recent high of 7.79% for a 30-year fixed-rate mortgage in late October 2023, rates are still significantly higher than they were in 2021. As of writing in December 2023, the average interest rate on a 30-year fixed-rate loan is 6.61%, which is higher than buyers are used to seeing for the last twenty years.

Higher interest rates can take a bite out of anyone’s home purchase budget. The possibility of lower rates is tangible, with the Fed indicating it might not raise interest rates again. But even if the Fed stops its string of rate increases, some experts predict mortgage rates will remain above 6% for the foreseeable future.

In addition to high interest rates, buyers are facing high home prices. A recent report from the National Association of Realtors found that the median price for existing home sales was $387,600 in November 2023, which is up 4% from the same time last year. Of course, that’s just the median. Buyers in some areas are facing significantly higher prices based on a relatively low supply for a higher demand.

2024 housing market predictions

As we move into the New Year, prospective buyers who want to make a home purchase this year cannot help but consider the question of is it a good time to buy a house?

In terms of mortgage rates, many expect these to fall a bit in 2024. However, the expected drop is relatively slight and buyers should expect to see elevated rates throughout 2024. Since a higher interest rate eats into your home purchase budget, it could force buyers to consider more affordable options. For example, buyers might need to consider smaller homes or less desirable locations to find a property that suits their budget.

How to know if it’s a good time for you to buy a house

When it comes to buying a house, the macroeconomic factors might not be as relevant as you think. Of course, interest rates and housing supply play into your ability to afford the home you desire. But the reality is that the decision to purchase a home requires as much introspection as it does monitoring interest rate trends.

Below are some things to consider before moving forward with a house search.

Personal financial situation

First and foremost, prospective buyers should consider their personal financial situation. Before you purchase a home, it’s important that your finances are in a stable position to accommodate the costs of homeownership.

Take a look at your income, savings, and current debts. Buying a house often involves taking on a relatively large loan, in the form of a mortgage. It’s best to avoid taking on this debt if you already have a lot of high-interest debt acting like a drain on your budget.

For prospective buyers with lots of debt, like credit card debt, consider paying off this debt before pursuing a home purchase. Not only will this improvement to your balance sheet come in handy on your mortgage application, but it can also free up necessary cash flow to support your homeownership endeavors.

It’s important to note that homeownership comes with lots of hidden costs. While you’ll definitely need to keep up with your mortgage payment each month, other expenses can sneak into your budget. For example, you might need to pay for lawn care and other maintenance. Additionally, repair bills can add up. It’s a good idea to expect extra costs beyond your mortgage payment. If you don’t have any extra wiggle room in your budget, your finances might not be ready for the responsibility of homeownership.

In addition to room to support ongoing homeownership costs, consider the fact that you’ll likely need to make a significant down payment. While you may not need to make the traditional 20% down payment, you should expect to make a down payment of at least 3% to 10%. If you don’t have a down payment available, start saving now to set the stage for homeownership.

Homeownership goals

Homeownership is a long-term financial commitment that can have a significant impact on your lifestyle. Before diving into a home shopping journey, consider what your goals are.

One top consideration is determining how long you plan to live in a space. For example, someone who wants to live in the same location for at least five to seven years might find a lot of value in homeownership. But someone who is planning to leave the area in one or two years might be better off renting.

Additionally, consider your family size and expectations. If you are planning to grow your family, finding a place with the space you need can pay off in the long run. Since homeownership is usually a long-term commitment, it’s a good idea to consider your lifestyle goals before moving forward.

If you think you’ll live in a place long-term, homeownership might be the right move for you.

Credit score

The right credit score can make all the difference to your home buying experience. A higher credit score not only offers you higher approval chances, it also unlocks the potential for a lower interest rate.

Take a minute to check your credit score. If you have a great score, you can move forward confidently. If you have a poor credit score, it’s worth taking the time to improve it. You can prioritize improving your credit score by committing to on-time payments, paying off credit card balances, and checking your credit report for any errors.

Understanding of the current market

The real estate market is constantly changing. A combination of high interest rates and relatively high prices has made this a difficult time for home buyers. But if your finances are ready for the commitment of homeownership, then it can still be a good time to buy.

Consider talking your options over with a local real estate agent to understand the current market conditions in your area. With more information about your location, you can start the home shopping process with your eyes wide open.

FAQ

Should I buy a house now or wait for a recession?

While it’s tempting to wait for home prices to drop dramatically before buying a house, there is no guarantee that will happen in the near future. If you are ready to buy a house based on your lifestyle goals and financial situation, it makes sense to move forward with your home purchase.

Will 2024 be a good time to buy a house?

Mortgage rates are expected to stay relatively high in 2024, which means it might not be the best time to make a home purchase. However, by purchasing a home, you’ll have the potential for home appreciation in the future.

Is the housing market going to crash in 2024?

Based on the current forecasts, it seems unlikely that housing prices will crash in 2024. In contrast, home prices are expected to remain stable or increase slightly.

The bottom line: Is now a good time to buy a house?

It’s impossible to predict the future of the housing market. However, you can evaluate your own financial situation to determine if you are ready for homeownership.

If you decide you are ready for homeownership, explore your mortgage options today.

The post Is it a good idea to buy a house in 2024? first appeared on My Mortgage Insider.

Extremely popular in the early 2000s, stated income loans were one of the factors of the housing market collapse. Why? Lenders were approving borrowers based on the income stated on their loan application but didn’t require income documentation to verify if it was accurate. The result: many borrowers could not make their mortgage payments and the result was foreclosure. Now, after the financial crisis, “no-doc mortgages” are a thing of the past.

With the passing of the Dodd-Frank Act of 2010, stated income loans for owner-occupied properties are now illegal. Lenders must fully document a borrower’s ability to repay the loan either with income or assets. (Stated income loans still exist for real estate investors, however, because they aren’t purchasing an owner-occupied home.)

That leaves some borrowers at a disadvantage, especially self-employed individuals or freelancers. But, the good news is that there is a type of loan called a bank statement loan (also referred to as alternative income verification loans) that meet these borrowers’ needs.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Stated income loans for self-employed borrowers

Self-employed borrowers may find it difficult to qualify for traditional mortgages due to their variable income and tougher documentation requirements from lenders. With alternative documentation loans — sometimes called bank statement loans — lenders use different methods to determine qualification but still meet the new ability-to-pay standards as laid out in the Frank-Dodd act.

For bank statement loans, lenders use bank statements (typically 2 years) to confirm a borrower’s income rather than tax returns and recent pay stubs like traditional borrowers. Each lender has its own underwriting requirements to determine net income (income minus business expenses and taxes), so if you don’t qualify with one lender, then there may be another that you will.

Bank statement loans are offered through non-QM lenders (also known as non-qualifying mortgage lenders), which sounds scary but simply means the loan can’t be sold to Freddie Mac or Fannie Mae, which most loans are. Not all lenders offer non-QM loans, so you’ll need to shop around — this list from the Scotsman Guide is a good place to start.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Qualifying for a bank statement loan

In addition to determining your net income, lenders also look at the following things when determining home loan qualification:

• Two-year timeframe. Most lenders require self-employed borrowers have at least two years of experience with consistent income.
• Debt-to-income-ratio. This ratio determines the maximum loan amount. Some lenders may go as high as 55% (traditional mortgages are usually between 36% to 45%), though the actual ratio is lender specific.
• Down payment. These loans tend to require larger down payments than traditional mortgages. A borrower with great credit may still be required to put 10% down (conventional mortgages allow for 3% down), but some lenders may require more.
• Credit score. Expect a higher credit score requirement with bank statement loans (680+). While you may qualify with a lower score, you’ll definitely be charged a higher interest rate.

Also, a note about interest rates. Because these loans are considered riskier, expect interest rates to be 1% or more higher than for traditional mortgages. Though, as more lenders start offering non-QM loans, rates may become more competitive.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Stated income loans for real estate investors

While stated income loans don’t exist for owner-occupied properties and they aren’t intended to buy a primary residence. They’re still available for borrowers looking to purchase an investment property. This is a big help for borrowers like real estate investors, house flippers, wanna-be landlords, and self-employed borrowers looking to purchase a non-occupant property and qualify for a loan program without fully documenting their income or providing tax returns.

Brian O’Shaughnessy, CEO of Athas Capital Group, says that many of his clients use these loan types to buy another rental property to better their cash flow, or they’re flipping a property and need a loan to finance the remodeling stage. In addition, some borrowers use stated income loans temporarily because they expect a large cash advance at the end of the year, but don’t want to pass up an investment property — they use these loans to keep a portion of their own capital to use for other investments.

“Stated income loans are growing. It’s a step up from hard money loans,” O’Shaughnessy says. (Hard money loans are specialized collateral-backed loans, which have high-interest rates and short terms usually around 12 months.)

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Qualifying for a stated income loan

Lenders who offer stated income mortgages aren’t qualifying borrowers nonchalantly. There’s still a mortgage application process. Borrowers need to have good credit scores, plenty of cash reserves, and a large down payment. Many stated income loans are based on the equity position of the property, which means that the more the borrower puts down, the easier it’ll be to get the loan.

“With us, a buyer has to put down at least 30% down compared to the regular 20% with a conventional loan. Many of our clients end up putting down 35%-50%,” O’Shaughnessy says. “The loan also has a maximum 70% loan-to-value ratio.”

The borrower’s employment is verified, but the application just has to state monthly gross income. Bank account statements and asset documentation are required to show that the borrower does indeed have the money. Also, similar to bank statement loans, interest rates will most likely be higher than a traditional mortgage loan depending on the lender.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

The post Stated Income Loans Available in 2024 first appeared on My Mortgage Insider.

Cash-out refinancing for primary residence (owner-occupied) homes are gaining in popularity, but so are cash-out loans for investment properties or second homes.

While they were hard to come by just a few years ago, many lenders now offer investment property owners the chance to cash in on their non-owner-occupied homes’ equity.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

Cash-out refinance for investment properties

If you’re someone who generates income from rental properties, then a cash-out refinance could be a great strategy for you. Cash-out refinancing could help you grow your rental income, for instance, if the cash is for home improvements. Many cash-out refinance applicants lower their existing mortgage interest rate while taking cash out, improving their positive cash flow.

Here’s what you need to know about the cash-out refinance rules as they apply to investment properties, and if you’re a good candidate.

Do you have equity in your rental property?

As with most cash-out refinancing programs, the more home equity you have, the better position you’ll be in to qualify and reap the benefits of a new loan.

For a non-owner-occupied refinance, most lenders will loan up to 75 percent of the appraised value of the home, the maximum set by Fannie Mae. In rare instances, you could find lenders that will go up to 80 percent, but these are probably the bank’s proprietary mortgage loan programs for which they charge a higher rate.

In other words, in order to make a cash-out refinance loan worth your while, you’ll need to have a certain amount of equity. Rental properties with 30 to 40 percent equity are the best candidates for cash out. Homeowners who purchased years ago might even drop their rate while taking cash out.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

Non-owner-occupied cash-out refi rules

Here are some recent eligibility requirements and guidelines for cash-out refinances on rental properties as set by Fannie Mae:

• The maximum loan-to-value ratio is 75% for 1-unit properties and 70% for 2- to 4-unit properties. These maximums are lowered by 10% for adjustable-rate mortgages.
• If the property was listed for sale in the last six months, the maximum LTV is 70%.
• The property must not be listed for sale at the time of home loan application.
• The property is not eligible for a cash-out refinance if it was purchased within the last six months. There is an exception for properties that meet the Delayed Financing guidelines.

Delayed Financing Rule: A rental property that was purchased within the last six months is eligible for a cash-out refinance if:

• The new loan amount is no more than the original purchase price plus closing costs.
• No mortgage financing was used for the home purchase unless the financing was on another property.
• The transaction was arms-length, meaning the seller did not have a pre-existing relationship nor financial interest in the sale besides the sale itself.
• The buyer has a final Closing Disclosure (final settlement statement) showing the purchase price and other details of the transaction.

Non-owner occupied cash-out refinances: Best for above-average applicants

Cash-out loans are risky business for lenders, especially in the case of those who are not living in the homes they are refinancing. That’s why qualifications are rigorous, and you can expect more paperwork than you would from an owner-occupied or no cash-out refinance.

For example, candidates must have a great credit score and 6 months’ worth of assets to handle the current mortgages on their rental and primary residences.

For qualifying borrowers, a cash-out refinance can allow you to turn your home value into cash without a second mortgage like a home equity loan or a home equity line of credit (HELOC). The interest rates on a cash-out refinance can be far more affordable than the rates associated with credit cards or personal loans.

Applicants will also have to present tax information, rental lease agreements, property value, and other property income information. Finally, if you already have more than four financed properties, some lenders may not accept your loan.

Check your investment property refinance rates. Start here (Sep 16th, 2024)

Is a cash-out refinance right for your investment property?

If you think you have ample equity, meet borrower requirements, and will benefit from a lower interest rate, there are just a few more things to consider before you move forward with cash-out refinancing.

For starters, work out how much your mortgage payment will increase, if any, by adding principal to your existing loan balance. Will your rental income be able to cover the increase?

Also, consider whether you will purchase more rental properties. Taking on additional debt could shift your debt-to-income ratio (DTI) in a way that affects your eligibility for future loans.

Also, because it will take time to see an income return on your refinancing, be sure that your cash-out loan will help you in the long run, not just to have some cash in the short term.

You also need to carefully go over the terms of the loan to be sure it makes sense for your investment goals. For example, it will now take longer to pay off the mortgage on your property.

Different lenders will have varied loan terms for non-owner-occupied refinances, including adjustable-rate mortgages versus fixed-rate. If you opt for an adjustable-rate mortgage, you have to be very confident that you will be able to handle fluctuations that may arise. This is why most property owners choose a fixed-rate mortgage when real estate investing.

Check your investment property refinance rates. Start here (Sep 16th, 2024)

Cash-out refinance FAQ

Can I get a cash-out refinance with an FHA loan or a VA loan?

Both the Federal Housing Administration (FHA) and Veterans Affairs (VA) loan programs offer cash-out refinance programs. However, neither program is intended to be used to purchase or refinance a second home or investment property.

What is the max LTV for investment property cash-out refinance?

Most cash-out loans for investment properties have a maximum LTV ratio of 70-75%, which will allow you to access between 25-30% of the home’s equity in cash.

What is the maximum loan-to-value ratio for a one-unit investment property?

The maximum LTV ratio for a one-unit property is 75%.

Can I get a cash-out refinance for an investment property?

Yes, there are refinance programs that will allow you to convert the equity you have in a second home or investment property to cash.

Where to apply for a rental property cash-out refinance

Once you factor all of the above into your decision, you may find that a cash-out refinance on your investment property can help you buy more rental homes or make improvements on existing properties.

The key with this option — as with any refinancing — is the new mortgage should either lower your monthly payments right away or put more cash flow into your pocket over time. If a non-owner-occupied cash-out refinance has one of those outcomes, then you should speak with a lender who specializes in these loans.

Most of today’s lenders offer cash-out refinances on rental properties at similar terms. You can get started on your application now. A loan officer can pre-qualify you and give you a rate and payment quote, which is the first step to making sure this type of mortgage refinance is the right move.

Check your cash-out refinance interest rates. Start here (Sep 16th, 2024)

The post Investment Property Cash-out Refinance | 2024 Guidelines first appeared on My Mortgage Insider.

But not every home — and not every borrower — will be eligible for this loan program.

To apply for a USDA loan with no money down, you’ll need to meet income eligibility rules, and you’ll need to buy a home in an eligible rural area.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

In this article:

• What is the USDA loan program?
• Who is eligible for a USDA loan?
• USDA home loan requirements
• USDA loans and mortgage insurance
• How does the USDA loan compare to other loan types?
• Other differences between USDA and other loans
• USDA home loan FAQs
• Our recommended USDA lenders

What is the USDA loan program?

The U.S. Department of Agriculture (USDA) operates two home loan programs to help low- and moderate-income families in rural areas become homeowners.

Here are the types of USDA home loans for buying existing homes:

• USDA Guaranteed Loan Program: Mortgages issued through this program actually come from private lenders. The USDA’s role is to guarantee mortgage loans. That way, moderate-income borrowers can get lower mortgage interest rates and make no down payment
• USDA Direct Loan Program: The USDA itself issues these mortgages to low-income applicants with standard fixed interest rates of 4% — and rates as low as 1% for some borrowers

These loans help individual borrowers, but they also help rural communities by increasing the demand for single-family housing, sparking economic development

Since its inception in 1949, the USDA Rural Development loan has helped millions of Americans buy housing with little or no money down.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

Who is eligible for a USDA home loan?

Not everyone can apply for a USDA loan. That’s because, unlike FHA loans and conventional loans, USDA loans have eligibility requirements that include rules about location and income.

Here’s how these limits work:

USDA Guaranteed Loan Income Limits

USDA Guaranteed loans are available to “moderate” income earners, which the USDA defines as those earning up to 115% of the area’s median income.

For instance, a family of four buying a property in Calaveras County, Calif., can earn up to $104,650 per year and still get a Guaranteed Loan. If the family earns more, it’ll be ineligible to apply.

Income limits vary by ZIP code and household size. Look up your area here. Typically, moderate earners find they are well within limits for the program.

Keep in mind, the USDA considers all the household income — not just the borrowers’ income. For instance, a family with a 17-year-old child who has a job will have to disclose the child’s income for USDA eligibility purposes.

The child’s income won’t affect whether lenders approve the borrower — just whether the household is eligible to apply for the USDA program.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

USDA Direct Loan Income Limits

USDA Direct Loans — which come directly from the USDA instead of from a private lender — enforce lower income limits than Guaranteed Loans.

For example, that same four-person household in Calaveras County, Calif., must earn $72,000 or less a year to get a Direct Loan.

Look up your area’s income limits here. When you find your county or city and your household size, look for its “low income” number. That’s the number Direct Loans use. (Guaranteed Loans use the “moderate income” number.)

USDA Mortgage Eligible Geographic Areas

To use USDA financing, your new home must be located in a USDA-eligible area. You can search USDA’s maps to browse certain areas or pinpoint a specific address. Just enter the home’s address in the search bar.

More locations than you might think are USDA-eligible. In fact, about 97% of the United States’ land mass is eligible, representing about 110 million people. Some properties in suburban areas outside large cities may be eligible for USDA financing. It’s worth checking, even if you think your area is too developed to be considered “rural.”

The USDA eligibility maps are still based on population statistics from the Census in the year 2020. Maps can change as population data changes.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

Upcoming Eligible USDA Map Changes for 2024

The USDA eligibility map changes with each Census every 10 years. The eligibility map can also change between Censuses as the USDA considers local and state population studies.

Because of these changes, it’s possible an area may appear eligible on the map even though it’s no longer eligible for USDA loans.

To determine, for certain, whether a home is still eligible before starting the application process, check with a USDA loan officer here.

USDA Home Loan Requirements: Eligibility vs Qualifying

The geographical and income requirements we’ve discussed so far determine who can apply for a USDA loan. They don’t determine whether applicants get approved for the loan.

Borrowers who are eligible for USDA borrowing still have to qualify for the loan by going through their lender’s underwriting process. Their income, debt-to-income ratio (DTI), and credit score will help determine whether their loan application qualifies.

Likewise, the home itself will have to qualify by falling within the USDA’s loan limits and by meeting the agency’s property guidelines.

Here are some details about qualifying:

Credit Score Requirements – Updated for 2024

The USDA recommends private lenders who underwrite no-money-down Guaranteed Loans accept credit scores of 640 or higher.

But lenders have some leeway here: They could allow a borrower with a 630 credit score, for example, if that borrower’s application is strong otherwise. Or they could require borrowers to have a credit score of 680 if the borrower’s loan file shows weaknesses.

For Direct Loans, the USDA itself is the lender. The government agency doesn’t set a minimum credit score requirement, but it will make sure borrowers can afford the loan payments before approving the loan.

Debt-to-income ratio (DTI) maximums – Updated for 2024

Borrowers have to prove they can afford the loan’s monthly mortgage payments. This proof comes from comparing the borrower’s income to the borrower’s existing debt load. Lenders call this comparison a debt-to-income ratio, or DTI.

For example, someone who earns $5,000 in gross monthly income and owes $2,000 a month in debt payments — including the new house payment — has a DTI of 40%. A 40% DTI is just low enough to qualify for a USDA Guaranteed Loan. Lenders typically won’t allow DTIs higher than 41%.

For Direct Loans, the USDA, acting as a lender, doesn’t use terms like DTI. But, again, the USDA will make sure borrowers can afford their monthly payments.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

USDA loan limits – Updated for 2024

USDA loans must fall within maximum loan limits for the area. This map will show your area’s maximum loan size for a no-money-down USDA Guaranteed Loan.

Once again we’ll look at that family of four in Calaveras County. That family could get a loan as large as $766,550. Loan sizes vary a lot by location since house prices vary so much by location. In San Francisco County, for example, a USDA Guaranteed Loan could reach up to $1,149,825.

USDA property requirements – Updated for 2024

Homes financed through the USDA loan program must meet the USDA’s requirements for the condition of the property. This excludes most fixer-uppers. The home must:

• Be structurally sound
• Be free of environmental hazards like lead paint
• Have access to water and electricity
• Have a working HVAC system
• Have a working plumbing system
• Have a roof that will last at least two more years
• Have windows and doors that open and close

A USDA appraiser will visit the home to make sure it meets the USDA’s property eligibility rules.

A home that doesn’t meet the USDA’s property requirements may still be eligible for a USDA Rehab Loan. This program can roll the home’s purchase price and its renovation costs into one loan.

USDA loans and mortgage insurance

Most borrowers have to pay for mortgage insurance to get their mortgage approved. Mortgage insurance protects the lender in case the borrower quits making payments and defaults on the loan.

Officially, USDA loans do not require mortgage insurance. But they require something very similar that serves the same purpose: The USDA Guarantee Fee.

About the USDA Guarantee Fee

The USDA Guaranteed Loan Program guarantees the lender it won’t lose money on your loan. (‘Guaranteed’ does not mean that every borrower’s approval is certain; the guarantee is for the lender.)

But this guarantee still helps the borrower. Backing from a government agency removes much of the risk from the loan and allows banks and mortgage companies to offer a zero-down loan at incredibly low rates.

Borrowers pay for this guarantee through the USDA Guarantee Fee which charges 1% of the loan amount upfront and 0.35% of the loan amount each year.

The annual fee is paid monthly in 12 equal installments. For each $100,000 borrowed, the upfront fee is $1,000 and the monthly premium is $29.

The borrower can roll the upfront fee into the loan amount or pay it out of pocket. Compared to other loan types like FHA, or the private mortgage insurance (PMI) on conventional loans, the USDA mortgage insurance fees are among the lowest.

How do USDA loans compare to FHA or conventional loans?

Most home buyers use conventional or FHA loans instead of USDA loans to buy new homes. Which loan type is better?

How USDA loans compare to conventional loans

The federal government cannot guarantee lenders won’t lose money on conventional loans. Because of this, loan approval depends more on the borrower’s credentials.

So, borrowers who have a big down payment, a high credit score, and a low debt-to-income ratio can often get a good interest rate on a conventional loan. This can save money because conventional borrowers don’t have to pay the Guarantee Fee, and they’ll have more flexible loan options.

But borrowers who struggle to qualify for a conventional loan will usually pay higher interest rates and higher mortgage insurance premiums. These borrowers can often save money with a government-backed loan program like USDA despite its fees and regulations.

Conventional lenders do add a private mortgage insurance premium (PMI) each year but no upfront fee. This annual PMI rate varies by borrower and won’t be charged on loans with 20% or more down.

How USDA loans compare to FHA loans

Like USDA loans, FHA loans have the backing of a government agency. In this case it’s the Federal Housing Administration that insures private mortgage lenders, allowing more affordable borrowing.

Unlike USDA loans, FHA loans have no income or geographic rules. Just about anyone can apply.

FHA loans are particularly good for borrowers with lower credit scores. Someone with a score as low as 580 could still get FHA approved with a down payment of 3.5%. (Borrowers with credit scores as low as 500 must pay 10% down, and not every lender will approve such a loan.)

Compared to the USDA’s credit score limit of 640, the FHA’s rules can be a game changer.

And along with more relaxed credit score requirements, FHA loans also feature more relaxed debt-to-income ratio rules. Some lenders may approve borrowers with DTIs as high as 50%.

However, FHA borrowers pay higher fees: 1.75% upfront and 0.55% annually for most new borrowers.

Other differences between USDA loans and other loans

Here are some other differences between USDA and other loan types:

USDA requires zero down (100% financing)

USDA loans can finance up to 100% of a home’s purchase price. That’s a huge pro that only the VA loan program for veterans can match.

For example, FHA loans require a minimum of 3.5% down payment, adding thousands to upfront expenses. Conventional loans can go as low as 3% down. The USDA’s no-money-down feature has allowed many people to buy a home who would otherwise be locked out of homeownership.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

USDA loan length

The USDA Guaranteed loan offers just two mortgage choices: 15- and 30-year fixed rate loans. Adjustable-rate loans are not available through the USDA. USDA Direct loans offer 33- and 38-year fixed-rate terms, which can lower monthly payments.

FHA and conventional loans offer a wider variety of fixed and adjustable-rate loans. Shorter terms, like a 10- or 12-year loan, require higher payments but charge less interest over time.

USDA mortgage rates

USDA loan rates often come in below conventional and FHA loans. Only VA loans, which only veterans and active duty military members can access, come in consistently lower.

The USDA’s backing — combined with the program’s higher credit score requirements — allows for lower rates.

Still, mortgage rates vary by borrower, lender, and home. Everybody’s rate is personal. Comparing different lenders and loan types should help you find your best deal.

Check your USDA interest rates. Start here (Sep 16th, 2024)

Closing Cost Options

USDA loans allow the seller to pay for the buyer’s closing costs, up to 3% of the sales price. Borrowers can also use gift funds from family members or qualifying non-profit agencies to offset closing costs when they supply this downloadable USDA gift letter signed by the donor.

USDA loans also allow borrowers to open a loan for the full amount of the appraised value, even if it’s more than the purchase price. Borrowers can use the excess funds to pay closing costs.

For example, a home’s price is $250,000 but it appraises for $255,000. The borrower could open a loan for $255,000 and use the extra funds to finance closing costs.

Asset Requirements

Borrowers who don’t have all their closing costs paid for by the seller, or by assistance programs, will need cash to close the loan. They will need to prove they have adequate assets. Two months of bank statements will be required.

There’s also a requirement that the borrower must not have enough assets to put 20% down on a home. A borrower with enough assets to qualify for a conventional loan without PMI will not qualify for a USDA loan.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

One of the Best 100% Financing Options

No-money-down loans are often misleading. In exchange for paying no money down the borrower pays more in interest and fees over time.

Not so with USDA loans. Borrowers can pay nothing down and still get a competitive interest rate and low annual fees.

Anyone looking for a home in a small town, suburban or rural area should contact a USDA loan professional to see whether they qualify for this program.

USDA Home Loans FAQs

Is FHA better than USDA?

For borrowers who want to pay 0% down, USDA loans are better than FHA loans. For borrowers with lower credit scores — as low as 580, FHA loans are better. For borrowers who can afford a large down payment and have a strong credit profile, a conventional loan could be best.

Is it hard to get a USDA home loan?

Borrowers who meet USDA income rules and who live in a USDA-designated rural area are eligible to apply for a USDA loan. Getting approved for the loan usually requires a credit score of 640 or higher, a debt-to-income ratio of 41% or lower, and a reliable source of income.

How long does it take to get approved for a USDA loan?

USDA loan approval times resemble other loan types. Most loans close in 40 to 50 days. Applicants who respond to their loan officer’s questions quickly can speed up close times.

I’m looking to buy a home in a suburban area. Should I still look into USDA financing?

Yes. Many suburban areas across the country are eligible for a USDA loan. Complete a short online questionnaire to find out if your area is eligible.

I thought USDA home loans were only for farms?

That’s a different USDA program. A USDA home loan cannot be used to finance the purchase of an income-producing farm. In fact, homes with low acreage may be more suitable for the program, since USDA may not allow a home if its land value is more than 30% of the total value of the home.

Are USDA Loans Some Obscure Loan Type That No One Actually Uses?

No. Thousands of home buyers use USDA financing each year. These mortgage loans are getting more popular all the time. Below is a map of how many loans were completed in each state in 2015.

Data: CFPB

Does USDA offer a Streamline Refinance program?

Yes. To qualify, the borrower must already have a USDA loan and must live in the home as a permanent resident. The new loan is subject to the standard upfront and annual Guarantee Fee, just like purchase loans. Refinancing borrowers must qualify using current income but may qualify with higher ratios than generally accepted if the payment is dropping and they have made their current mortgage payments on time. If the new upfront fee is not being financed into the loan, the lender may not require a new appraisal.

Can I get a construction loan with USDA?

Homebuyers who wish to build a home with a USDA loan can do so using the USDA construction loan program which combines a construction loan and a traditional 30-year fixed USDA loan into a single-close loan.

Can I buy a new construction home with a USDA mortgage?

Yes. In fact, a new home should meet USDA minimum standards even more easily than will an existing home. Many housing developments are going up in USDA-eligible areas, making this loan a great choice for new homes.

Check your eligibility for a USDA construction loan. Start here (Sep 16th, 2024)

Does USDA require the property to be in good condition?

Generally, yes. The appraiser will state in the appraisal report whether or not the property conforms to minimum standards, which are the same property requirements needed for an FHA loan. Make sure your lender selects an FHA-approved appraiser who can verify the property meets FHA standards.

Can I buy a vacation home with a USDA loan?

USDA loans are intended for the purchase of a primary residence. This type of housing loan cannot be used to purchase a second home.

Can I buy a condo or townhome with a USDA loan?

Yes, however, the lender has to confirm that the condo or townhome meets FHA, Fannie Mae, Freddie Mac or VA requirements. The lender assumes a lot of liability by certifying that a condo project meets these requirements, so they may not be willing to approve a USDA loan for a condo or townhome.

Can I buy a manufactured home with a USDA loan?

USDA typically allows buyers to purchase new manufactured homes only. While pre-existing manufactured homes are typically not allowed, they may be acceptable if the current owner has a USDA home loan on the property. Ask your real estate agent for this information.

New manufactured homes must meet certain thermal performance standards and be permanently affixed to a foundation. It also must have a minimum living space of 400 square feet. A buyer who is interested in a manufactured/mobile home should check with their real estate agent and lender about whether the home is USDA-eligible.

Are USDA home loans only for first-time homebuyers?

No. Buyers who have purchased before may use the USDA program. However, borrowers usually have to sell their current home or prove it’s either too far away from their work or otherwise is no longer suitable.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

Does USDA allow gifts to help with closing costs?

Yes. Gifts can be used provided they are from a relative, charitable organization, government entity, or nonprofit. In some cases, a gift from a friend can be used if proof of the relationship prior to the loan transaction can be established. Applicants receiving a gift will need to complete USDA’s gift letter form. Download the form here.

What’s the minimum credit score allowed for a USDA loan?

USDA grants the highest approval levels to those with a 660 score and above, but the USDA’s recommended minimum credit score is 640.

I have no credit. Can I get a USDA loan?

Borrowers who don’t have an established credit history may be able to qualify for a USDA loan. At least 4 non-traditional sources will be needed, such as:

• Rental history
• Utility payment records
• Insurance payments

Can I finance my funding fee even though my LTV will be more than 100%?

USDA does not consider the Guarantee Fee as part of its loan-to-value (LTV). So in essence, USDA allows for an LTV of a little over 101%.

Why doesn’t every buyer use the USDA home loan program?

Most homebuyers would prefer to do a USDA loan, but perhaps the areas in which they are looking are not USDA-eligible. Larger urban and surrounding areas are not eligible, since the point of the program is to encourage rural development. Still, a surprising number of developed suburban areas are still eligible.

Apply for USDA here

USDA home loan rates are low and free quotes are available now. Check your eligibility for this program and find out about USDA-eligible areas near you. Complete a short online request form to get started.

Check your eligibility for a USDA loan. Start here (Sep 16th, 2024)

The post USDA Home Loans | Requirements & Qualifications 2024 first appeared on My Mortgage Insider.

The “Affordable Loan Solution” mortgage is a conventional loan program from Bank of America intended to be a less expensive option than the popular FHA-backed mortgage. It requires just 3 percent down and no mortgage insurance.

Take advantage of low rates with just 3% down

Low- to no-downpayment loans are popular among home buyers. Mortgage rates are incredibly low, and rental payments are expected to increase significantly in the future.

However, new homebuyers are finding it difficult to come up with 20% of the home value upfront. Fortunately, borrowers don’t need to put 20% down. In some cases, they will only need to put 3 percent down, and potentially, home buyers may not need to make a downpayment at all.

With today’s low mortgage rates, lenders are rolling out programs that make it easier for a home buyer to get accepted for a low downpayment loan. The new 3% down loan is just one of many low downpayment loans available to those looking to get a mortgage.

New low down payment home loan only for certain buyers

This home buying program targets a specific group of aspiring homeowners.

Not every home buyer will be eligible. Some will not meet credit score minimums. Others might earn an income that lies outside of eligible levels.

Applicants must meet the following requirements.

• They must make less than their area’s median income
• They must have a credit score of at least 660
• They must purchase the home as their primary residence

The loan was created to give potential FHA borrowers another mortgage loan option. This new loan could save borrowers over $100 a month in payments on a $150,000 30-year fixed-rate mortgage near current interest rates, as compared to a similar FHA loan.

While an FHA loan has more flexible eligibility, those that meet the requirement for the “Affordable Loan Solution” loan may find that it is a better option for their budget.

Mortgage insurance requirement waived

Along with the benefit of a low down payment, this new mortgage program will not require private mortgage insurance (PMI).

The appeal to avoiding PMI payments is monthly payments will be lower. PMI was created to allow home buyers to get loans even if their down payment was below the 20% threshold. If a borrower gets an FHA loan and puts 5% down, they would be required to pay PMI. PMI can significantly increase your monthly mortgage payment in exchange for the benefit of a reduced downpayment.

This new loan program is backed by Freddie Mac and the non-profit Self-Help, so the borrower doesn’t need to pay any form of mortgage insurance premiums. This could save home buyers a decent amount of money over the life of the loan — money that can instead go to increasing your home equity.

Other loan options may still be a better fit for some home buyers than Bank of America’s new program. Their minimum credit score of 660 is higher than the FHA loan, which requires just a 580 score to qualify for the 3.5% minimum down payment.

Roughly half of the country has a credit score below 660. This, along with other restrictions, may make it difficult for some home buyers to get approved for a conventional mortgage.

Plus, Bank of America has not specified what their mortgage rates are on this program. Even without PMI payments, the new loan program could mean a higher interest rate than FHA, Conventional 97 or HomeReady loans, depending on your financial situation.

Other low down payment mortgage options available

Bank of America isn’t the only lender offering 3 percent downpayment loans. Large and small mortgage lenders and banks across the country offer low downpayment loans that are not specific to a single lender.

The HomeReady mortgage

HomeReady is a Fannie Mae program that allows 3% down and a credit score of just 620. Guidelines limit the amount the eligible applicant can make in some areas of the country. In areas considered underserved, there is no income limit.

This loan is considered the first multi-generational loan, since buyers can use the income of non-borrowing household members to help them qualify. Adult children can qualify more easily when buying a bigger home they plan to live in with their elderly parents.

Conventional 97 mortgage

The Conventional 97 loan also requires just 3% down with a low credit score of 620. Borrowers will have to pay PMI, but on a 30-year fixed-rate mortgage these payments will go away after 10 years.

Quicken Loans has their own 3% down mortgage program called the Home Possible mortgage. While it does require PMI, borrowers can have a higher annual income with Home Possible than with Bank of America’s loan.

USDA loans

If borrowers are looking for low down payments, a USDA loan should not be overlooked. USDA loans require 0% down payment and the minimum required credit score is 640. Also, they do not require PMI, but rather an annual fee that is usually much lower than most mortgage insurance.

USDA loans are only available in areas that are less dense in terms of population, but many suburban areas are eligible. Borrowers may also make up to 115 percent of their area’s median income, making these loans less exclusive than most low-to-no down payment mortgages.

VA loans

For home buyers with qualifying military service, a VA-backed mortgage loan is an attractive option. These loans are available with no down payment and lower interest rates. Borrowers won’t have to pay mortgage insurance either though there is a one-time funding fee that allows the program to be self-sustaining and is significantly less than monthly mortgage insurance premiums.

Today’s rates

The best loan option not only depends on your down payment but also on your mortgage rate.

Mortgage rates change daily, and lower rates can make it even easier to afford a new home with a low down payment.

The post Avoid PMI Without 20% Down | Guide 2024 first appeared on My Mortgage Insider.

The Conventional 97 program allows homebuyers to get a conventional mortgage loan with only 3% down.

The program is named for the 97% of the home value that is financed by the lender after the buyer makes a 3% down payment.

The loan program can finance a single-family home or condo unit — as long as the buyer plans to use the home as a primary residence.

Conventional 97 offers an alternative to FHA loans, which require a similar 3.5% down payment.

Check your eligibility for a 3% down payment conventional mortgage. Start here (Sep 16th, 2024)

In this article:

• Conventional 97 loan guidelines
• Credit score requirements
• Conventional 97 mortgage rates
• Conventional 97 vs FHA and other loan types
• Conventional 97 loan FAQ
• How to get a Conventional 97 Loan

2024 conventional 97 guidelines

Aside from requiring only 3% down, Conventional 97 loans work a lot like other conventional mortgage loans.

But this loan program works only for first-time home buyers — defined as buyers who haven’t owned a home in the past three years. For borrowers looking for a low down payment mortgage, it can be a good mortgage option.

Here are some other Conventional 97 loan qualifications:

• The loan must be a fixed-rate mortgage
• The property must be a one-unit single-family home, co-op, PUD, or condo
• At least one buyer must not have owned a home in the last three years
• The property must be the owner’s primary residence
• At least one borrower must take a homebuyer education course
• The loan amount must be at or below $766,550

These features align well with the typical first-time homebuyer’s profile.

For instance, most buyers today are looking for a one-unit home — as opposed to a duplex or triplex — or a condo that they plan to live in as their primary residence. First-time buyers are also likely to be seeking something with a lower purchase price.

Today’s average home price is around $350,000 according to the National Association of Realtors, putting a Conventional 97’s average down payment at $10,500 — within reach for many home shoppers.

By comparison, making a 20% down payment would require $70,000 upfront.

Check your eligibility for the conventional 97% LTV program. Start here (Sep 16th, 2024)

Conventional 97 credit requirements

Many homebuyers assume they need impeccable credit scores to qualify for a loan that requires only 3% down. That’s not the case.

According to Fannie Mae’s Loan Level Price Adjustment (LLPA) chart, a borrower can have a score as low as 620 and still qualify for a 3% down loan.

How is this possible? Private mortgage insurance, or PMI, is one reason. When you put less than 20% down, you’ll pay these premiums which protect the lender in case you default.

This extra layer of protection for the lender enables the lender to offer lower rates.

Check your 97% LTV rates. Start here (Sep 16th, 2024)

Is it worth paying PMI?

PMI gets a bad rap. But paying it can unlock decades of savings on interest for new homeowners.

Yes, private mortgage insurance would make the 3% down option more expensive on a monthly basis, at first.

But the borrower’s down payment requirement is substantially lower, allowing them to buy a home much sooner — before house prices increase again.

And remember, you can cancel PMI when the loan’s balance reaches 80% of the home’s value. Lenders call this percentage your loan-to-value ratio, or LTV.

When LTV falls to 78% of the property’s value, PMI automatically drops off.

Conventional 97 interest rates

Mortgage rates for the 3% down payment program are based on standard Fannie Mae rates, plus a slight rate increase.

However, this fee or rate increase is often minimal compared to the value added from earlier home buying.

Someone buying a $300,000 home would pay about $80 more per month by choosing the 97% loan option compared to a 5% down loan.

Yet, the buyer reduces their total upfront home buying costs by over $5,000.

The time it takes to save an extra 2% down payment could mean higher real estate prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.

Check your eligibility for a 3% down payment conventional mortgage. Start here (Sep 16th, 2024)

Low down payment alternatives to Conventional 97 loans

Conventional 97 loans vs FHA loans

Before Fannie Mae introduced 3% down payment conventional loans, more home buyers who needed a low down payment loan chose an FHA loan.

FHA loans are still the best choice for a lot of buyers. The Federal Housing Administration, which insures these loans, requires 3.5% down for most new home buyers, putting an FHA down payment in the neighborhood of a Conventional 97’s.

But unlike conventional loans, FHA loans allow credit scores below 620 — and as low as 580. Plus, the FHA doesn’t add Loan Level Price Adjustments like conventional loans.

So, if your credit is borderline — just barely good enough to qualify for a Conventional 97 — you might draw a better-rate loan from the FHA.

The catch is the FHA’s mortgage insurance. Unlike PMI on a conventional mortgage, FHA mortgage insurance premiums (MIP) won’t go away unless you put 10% or more down. You’ll keep paying the annual premiums until you pay off the loan or refinance.

The FHA also charges an upfront mortgage insurance premium. This one-time, upfront fee totals 1.75% of the loan amount for most borrowers.

Conventional 97 vs other government-backed loans

FHA isn’t the only government-backed loan program. Two other programs — USDA loans and VA loans — offer new home loans with no money down.

Unlike FHA and conventional loans, USDA and VA loans won’t work for just any borrower.

VA loans go to military members or veterans. They’re a perk for people who have served. And they’re an attractive perk. Along with putting no money down, VA borrowers won’t pay annual mortgage insurance — just an upfront funding fee.

Zero-down USDA loans work in rural and suburban areas and only for borrowers who earn less than 115% of their area’s median income. They also require a higher credit score — usually 640 or higher.

Conventional 97 vs other low down payment conventional loans

Fannie Mae and Freddie Mac offer more than one low down payment loan. So far in this post, we’ve been discussing Fannie’s standard 3% down mortgage.

But some borrowers may prefer:

• Fannie Mae’s HomeReady: This 3% down loan is designed for moderate-income borrowers. If you earn less than 80% of your area’s median income, you may qualify for HomeReady. What’s so good about HomeReady? In addition to low down payments, this loan offers reduced PMI rates which can lower your monthly payments
• Freddie Mac’s Home Possible: This 3% down loan works a lot like HomeReady. It adds the ability to use sweat equity toward the down payment. This can get complicated, and you’d need the seller’s approval in advance. But it is possible.
• Freddie Mac HomeOne: This 3% down loan resembles the standard Conventional 97 from Fannie Mae. Unlike HomeReady and Home Possible, there are no income limits to worry about.

Your loan officer can help identify the low down payment loan that works best for you.

Check your eligibility for a 3% down payment conventional mortgage. Start here (Sep 16th, 2024)

97% LTV Home Purchase FAQ

What is a Conventional 97 loan?

A Conventional 97 is a conventional mortgage that requires only 3% down. It’s named for the remaining 97% of the home’s value that the mortgage will finance.

How do you qualify for Conventional 97?

Qualifying for a Conventional 97 loan requires a credit score of at least 620 in most cases. Debt-to-income ratio (DTI) should also fall below 43%. There are no income limits. Borrowers who already own a home or who have owned a home in the past three years won’t qualify.

Do all lenders offer Conventional 97?

Most lenders offer Conventional 97 loans. This product conforms to Fannie Mae’s rules. Lenders that offer Fannie Mae loans will likely offer this 3% down product.

Can closing costs be included in a conventional 97 loan?

No. As its name indicates, the Conventional 97 program can finance up to 97% of a home’s appraised value. Rolling closing costs into the loan amount would push the loan beyond this 97% threshold. However, many first-time homebuyers qualify for down payment and closing cost assistance grants and loans. Conventional 97 also allows gift funds. This means family members or friends could help you cover closing costs.

Who offers Conventional 97 loans?

Most private mortgage lenders — whether they’re online, downtown, or in your neighborhood — offer Fannie Mae conventional loans which include Conventional 97 loans.

Is there a minimum credit score for the 3% down payment program?

Borrowers need a credit score of at least 620 to get any Fannie Mae-backed loan. The exception would be those with non-traditional credit who have no credit score. Mortgage lenders can set their minimum credit scores higher than 620. Some may require 640 or 660, for example. Be sure to check with your mortgage lender to find out for sure.

Can I use down payment gift funds?

Yes. Fannie Mae states gift funds may be used for the down payment and closing costs. Fannie does not set a minimum out-of-pocket requirement for the buyer. You may also qualify for down payment assistance. Your mortgage officer can help you find programs in your state.

Can I buy a condo or townhome?

Yes. Buyers can purchase a condo, townhome, house, or co-op using the Conventional 97 program as long as it is only one unit.

Can I buy a manufactured home with 3% down?

No. Manufactured homes are not allowed with this program.

Can I buy a second home or investment property?

No. The 97% loan program may be used only for the purchase of a primary residence.

I owned a home two years ago but have been renting since. Will I qualify?

Not yet. You must wait until three years have passed since you had any ownership in a residence. At that point, you are considered a first-time home buyer and will be eligible to apply for a Conventional 97 loan.

Will mortgage insurance companies provide PMI for the 97% LTV home loan?

Yes. Mortgage insurers are on board with the program. You do not have to find a PMI company since your lender will order mortgage insurance for you.

How much is mortgage insurance?

Mortgage insurance varies widely based on credit score, from $75 to $125 per $100,000 borrowed, per month.

Can I get a conforming jumbo loan with 3% down?

No. This program won’t let lenders exceed conforming loan limits. At this time, high balance, also known as conforming jumbo loans — those over $766,550 — are not eligible.

I’m already approved putting 5% down, but I’d like to make a 3% down payment instead. Can I do that?

Yes. Even if you’ve already been through the underwriting process, your lender can re-underwrite your loan if it offers the Conventional 97 program. Keep in mind your debt-to-income ratio will rise with the higher loan amount and potentially higher rate.

Check your mortgage rates. Start here (Sep 16th, 2024)

What’s the maximum debt-to-income (DTI) ratio for the 97% LTV program?

Your overall profile including credit score determines your DTI maximum. While there’s no hard-and-fast number, most lenders set a maximum DTI at 43%. This means that your future principal, interest, tax, insurance, and HOA dues plus all other monthly debt payments (student loans, credit card minimum payments) can be no more than about 43% of your gross income.

Can I use the 3% down program to refinance?

Yes. If you have an existing Fannie Mae loan, you may be able to refinance up to 97% of the current value. Refinancing might allow borrowers to lower their monthly payments or eliminate mortgage insurance premiums.

Click here for more information about the 97% LTV refinance program.

Why is the program only for first-time home buyers?

Fannie Mae’s research uncovered that the biggest barrier to homeownership for first-time homebuyers was the down payment requirement. To spur more people to buy their first home, the minimum down payment was lowered.

Are there income limits?

The standard 3% down program does not set limits on your income. However, the HomeReady 97% loan does require the borrower to be at or below 80% of the area’s median income.

What is a HomeReady mortgage?

HomeReady is another program that requires 3% down. It has flexibilities built-in, such as using income from non-borrowing household members to qualify.

To see if you qualify for the HomeReady program, see the complete guidelines here.

What is the Home Possible Advantage program?

HomeReady is another program that requires 3% down. HomeReady loans have flexibilities built-in, such as using income from non-borrowing household members to qualify.

How to get a conventional 97 loan

The Conventional 97 mortgage program is available immediately from lenders across the country. Talk with your lenders about the loan requirements today.

The ability to put only 3% down could open doors for you.

Check your eligibility for a 3% down payment conventional mortgage. Start here (Sep 16th, 2024)

The post Conventional 97 Loan | Guidelines & Requirements 2024 first appeared on My Mortgage Insider.