Nothing could be further from the truth.

The fact is that there have always been and always will be mortgage options for borrowers that don’t have a large down payment.  Here are five loan options for those who have 5 percent or less for a down payment.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

#1: Conventional loans with PMI

Conventional loans are mortgages approved using guidelines established by mortgage giants Fannie Mae and Freddie Mac. Historically, lenders required a down payment of 20 percent. Yet in 1957, private mortgage insurance, or PMI, was introduced.

Mortgage insurance is an insurance policy that repays the lender should the borrower default. The borrower pays for this insurance policy along with their monthly mortgage payment. This extra expense can be well worth it though.

Say a home is sold for $200,000. A 20% down payment is $40,000. That’s quite a lot for new home buyers. A 5 percent down is much more feasibly, at only $10,000. A PMI policy can be purchased at a cost of approximately $150 to $300 per month, depending on credit score. But this option helps bring down the barriers to homeownership significantly.

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

#2: Federal Housing Administration (FHA) loans

In recent years, FHA has been the standard for first-time home buyers. Although that’s shifting because of increased offerings in conventional lending, they are still very popular.

FHA loans require as little as 3.5% down, a bit less than the conventional requirement. That means on a $200,000 loan, the minimum down payment is just $7,000.

An FHA loan has a monthly mortgage insurance requirement like a conventional loan, but it also has an “upfront mortgage insurance premium,” or MIP. The MIP is 1.75% of the loan amount, or in this example an additional $3,500. However, this upfront premium does not have to be paid out of pocket and can be rolled into the loan amount.

The monthly mortgage insurance premium for an FHA loan is typically 1.35% of the loan amount per year, divided into 12 equal installments and added to the monthly payment. For example, a $200,000 total loan amount would require $225 per month in mortgage insurance.

Although an FHA loan is more expensive than its conventional counterpart, it allows for a lower credit score and offers more lenient income requirements, making it the best program for some home buyers.

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

#3: VA loans

This program is a special entitlement offered to active duty personnel and veterans of the U.S. armed forces. The VA loan requires no down payment whatsoever. In addition, there is no monthly mortgage insurance premium, just an upfront premium, usually 2.3% of the loan amount.

The minimal costs associated with this loan make it the clear choice for current and former members of the military.

Those who have served in one of the branches of the military including the National Guard or Reserves could be eligible.

For complete guidelines, see our VA home loan page or contact a VA-approved lender.

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

#4: USDA loans

Sometimes referred to as the Rural Development Loan, the USDA program requires no down payment.  As the name implies, the program is designed to assist borrowers buy and finance a property in rural, less urban areas.

In order to qualify for a USDA loan, the property must first be located in an eligible area. These areas are mapped on the USDA website. This is the first place borrowers should visit to see if a prospective home is eligible. By entering the address on the website, the property’s eligibility will be determined.

Eligible areas are often rural in nature, but surprisingly, many eligible areas are suburbs of bigger metropolitan areas. Even if you don’t think the area in which you’re looking to buy a home is eligible, it’s worth taking a look at the USDA loan map.

You could discover that you’re able to buy a home with zero down payment.

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

#5: Fannie Mae HomePath loans

Editor’s note: Fannie Mae ended their HomePath program on October 6, 2014. For more details, visit our Fannie Mae HomePath page.

Fannie Mae has a list of foreclosed properties that it offers for sale on the website HomePath.com. Buyers can look for homes in their area with a simple city or ZIP code search.

Home buyers can purchase these homes with only 5% down. What’s more, buyers receiving a gift from an eligible gift source only need $500 of their own money.

Unlike a standard conventional loan, Fannie Mae HomePath loans don’t require mortgage insurance or an appraisal. Some of the properties may be in need of repair, but they provide a great opportunity, especially for first-time home buyers who have little to put down on a home.

A 5% down payment is all you need

Lenders have realized that it’s unrealistic to require a 20% down payment considering today’s home prices. That’s why many programs are available, even to those with less-than-perfect credit and little money saved.

And current interest rates make it even more affordable to buy a home. Contact a reputable lender to find out which of these programs might work best for you.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

The post 5 Ways to Buy a Home with 5% Down or Less 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.

But this loan program has a tradeoff: FHA mortgage insurance premiums (MIP). Someone with a $250,000 FHA loan can expect to pay about $30,000 in mortgage insurance premiums over the life of the loan. Those insurance payments can really add up.

Some FHA borrowers can get rid of their monthly mortgage insurance premiums. Others will need to refinance into another type of loan to eliminate this extra monthly expense. Here are some tips for FHA mortgage insurance removal.

See if you can cancel your FHA mortgage insurance. Start here (Sep 16th, 2024)

What is FHA mortgage insurance premium (FHA MIP)?

FHA mortgage insurance premium, also known as FHA MIP, helps keep the Federal Housing Administration (FHA) loan program operating.

The FHA is not a mortgage lender; instead, it’s an insurance provider for lenders. When you get an FHA loan, your lender provides the money. The FHA insures the loan.

So if you stopped making payments and the lender had to foreclose, the FHA would step in to help cover the lender’s losses.

With this insurance coverage in force, the lender can approve loans even when the borrower has average credit, a low down payment, and a debt-to-income ratio up to 50 percent.

But it’s the borrower who pays the mortgage insurance premiums (MIP).

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

How much does mortgage insurance cost?

Modern FHA mortgage loans charge two types of mortgage insurance premiums:

• Upfront MIP: This coverage adds 1.75 percent of the loan amount upfront. For a $250,000 loan, 1.75 percent equals $4,375 to be paid as part of closing costs or rolled into the loan amount.
• Annual MIP: Most borrowers pay 0.85 percent of their loan balance each year in annual MIP. For a $250,000 loan balance, 0.85 percent equals $2,125, which would be broken down to 12 monthly payments of about $177 each.

The FHA charges a different annual insurance rate for some loans, and we’ll explore those details more below. Most borrowers pay the 0.85 percent annual rate.

Paying these premiums can be a good deal: They can save more in interest than they cost in monthly fees. Still, many borrowers want to get rid of this added cost.

How do I cancel my FHA mortgage insurance premium (MIP)?

The Federal Housing Administration changes its mortgage premium costs and policies from time to time. So how, and whether, you can cancel your FHA MIP will depend a lot on the age of your loan.

The last major change in FHA MIP policies went into effect on June 3, 2013. This means loans that were closed prior to June 3, 2013, have different policies.

For FHA loans opened before June 3, 2013

If you closed your FHA loan prior to June 3, 2013, you can cancel your loan’s annual MIP payments if:

1. The mortgage loan is in good standing
2. Your loan balance is at or below 78% of the last FHA-appraised value, usually the original purchase price.

If you haven’t quite reached the 78% loan-to-value ratio (LTV), keep making regular payments and checking with your loan servicer.

Borrowers who have already hit the magical 78% LTV can potentially start saving hundreds on their monthly payments and keep their existing FHA loan and interest rate intact.

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

For FHA loans opened on or after June 3, 2013

Most home buyers with newer FHA loans will have a harder time canceling their annual MIP payments. That’s because the FHA made annual MIP permanent for many borrowers starting in 2013.

Unless you put at least 10 percent down on your home — much higher than the 3.5 percent minimum down payment required for most borrowers — you’re stuck with annual MIP payments until you pay off the loan.

If you put 10 percent or more down, your MIP will go away after you’ve made payments on your loan for 11 years.

If you put less than 10 percent down, you’ll likely need a mortgage refinance to eliminate these monthly premiums.

See if you can cancel your FHA mortgage insurance. Start here (Sep 16th, 2024)

Refinancing out of FHA MIP

If you’ve built up a fair amount of equity in your home, refinancing out of the FHA loan program can eliminate FHA mortgage insurance premiums.

Most homeowners with FHA loans refinance into a conventional loan. Conventional loans do not have insurance from the federal government so borrowers will need stronger credit scores and enough home equity to qualify.

Most conventional lenders require 20 percent home equity for refinance loans. That means your current loan balance can’t exceed 80 percent of your property value. For a home with a value of $300,000, you’d need to pay your loan balance down to $240,000 or lower to refinance.

Rising home values also help you build equity more quickly and since prices have been going up, many homeowners will reach 20% equity faster than they would through regular loan payments alone.

Keep in mind that rising home values also help you build equity more quickly. And since prices have been going up across the nation, many homeowners will reach 20% equity faster than they would through regular loan payments alone. If you think you have enough equity to refinance out of MIP due to rising home values, your lender can check via an appraisal during the refi process.

Refinancing won’t always save money, even if you get rid of FHA MIP. If your new refinance rate exceeds your current rate, for example, you will likely pay more in interest on your new loan than you’re paying in MIP right now.

Be sure you get at least three loan offers to find the lowest possible rate. It’s also important to know that conventional loans require mortgage insurance, too — if you refinance with less than 20 percent equity.

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

Conventional PMI vs FHA mortgage insurance

Conventional mortgage loans do not require government mortgage insurance premiums (MIP), but they do require private mortgage insurance, or PMI.

Unless you put 20 percent down — or refinance with at least 20 percent in home equity — your conventional lender will likely require PMI.

PMI will add extra money to your monthly mortgage payment just like the FHA’s annual MIP. PMI may even exceed FHA MIP rates depending on your credit score, debt load, and home equity.

But, unlike with the FHA’s current MIP policies, it’s possible to cancel a conventional mortgage’s PMI.

Once your loan balance falls to 80 percent of the current value of your home, you can request PMI cancellation. PMI should cancel automatically when your loan reaches 78 percent LTV.

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

Can you get rid of PMI on an FHA loan without refinancing?

Refinancing requires closing costs which could add 5 percent or more to the cost of your new loan. And, with mortgage rates increasing, refinancing could cost even more if you can’t match or beat your current home loan’s rate.

Some FHA loan holders can get rid of their mortgage insurance premiums without refinancing. If you:

• Put 10 percent or more down: Your annual MIP will go away on its own after you’ve made payments for 11 years.
• Closed your loan before June 3, 2013: Your annual MIP will go away once you’ve paid your loan down to 78 percent of your home’s value. If your FHA-appraised value is $250,000 and your loan balance is $195,000, you can stop paying MIP.

But if you put less than 10 percent down on a loan closed on or after June 3, 2013, your MIP will remain for the life of the loan. You’d need a mortgage refinance — or to pay off the loan completely — to stop paying MIP.

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

Tips to lower your FHA mortgage insurance rate

When you’re shopping for a mortgage, the FHA loan program’s mortgage insurance premiums may seem like a big downside — especially since annual MIP often lasts for the life of the loan.

But not all borrowers pay the full 0.85 percent annual MIP rate for the life of the loan. By shortening your loan term to 15 years or making a larger down payment, you can reduce your annual MIP rate and term.

For example, if you:

• Get a 15-year loan instead of a 30-year loan: Your annual MIP rate would be 0.70 percent for the life of the loan
• Put 5 percent down on a 30-year loan: Your annual MIP rate would go down to 0.8 percent for the life of the loan
• Put 10 percent or more down on a 30-year loan: You’d pay an annual MIP of 0.8 percent for 11 years
• Put 10 percent or more down on a 15-year loan: You’d pay a 0.45 percent annual MIP rate for 11 years

If you borrow more than $625,500, you’ll see higher annual MIP rates. They could go as high as 1.05 percent of your loan balance.

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

Is FHA MIP more expensive than PMI?

When you can pay 20 percent down on your mortgage loan, the MIP vs PMI question is easy: You’ll save with a conventional loan that requires no PMI payments when you put 20 percent down.

If you’re making a smaller down payment, the question is more complicated. For some borrowers, the FHA’s mortgage insurance premium (MIP) costs less than the private mortgage insurance (PMI) on a conventional loan.

Unlike FHA MIP rates which are set based on your down payment size and loan term, private mortgage insurance rates vary by lender and borrower. Annual PMI rates tend to range from 0.5 to 1.5 percent of the loan amount.

A borrower who barely qualifies for a conventional loan — which often means a credit score around 620 and a down payment of at least 3 percent — may save more money with an FHA loan, despite the loan’s 1.75 percent upfront mortgage insurance premium.

Every borrower is different. To see your actual costs, you’ll need to compare Loan Estimates from a variety of lenders.

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

Four ways to get rid of PMI

The biggest benefit of paying PMI on a conventional loan instead of MIP on an FHA loan is the PMI cancellation policies.

The Homeowners Protection Act of 1998 helps ensure borrowers won’t pay PMI indefinitely.

To get rid of PMI on a conventional loan you can:

• Make payments until PMI is canceled: When you have a conventional loan, getting rid of PMI is just a matter of waiting. Your lender will cancel PMI once you’ve paid down your original loan balance down to 78 percent of the value of your home
• Ask for cancellation when you achieve 20 percent equity: You don’t have to wait until you’ve reached 78 percent LTV. When you reach 80 percent LTV — or 20 percent equity — you’re eligible for PMI cancellation. You just have to ask your loan servicer
• Get a new valuation: The value of your home is defined by a home appraisal. If you think your home value has increased a lot recently, a new appraisal may show you already have 20 percent equity — enough to cancel PMI. If you don’t request a new valuation, your lender will likely calculate your equity based on your original value
• Refinance if equity has increased: Different conventional loan programs backed by Freddie Mac and Fannie Mae have different PMI requirements. You could refinance into a program that doesn’t require PMI for your home

There’s another way to eliminate PMI, but it works only for active-duty military members, military veterans, and some surviving spouses of veterans who were killed in the line of duty.

A VA cash-out refinance — which is available only for members of the military community — can help you refinance from a conventional loan into a VA loan and will not require any annual mortgage insurance. The loan does require an upfront funding fee, however. If you ever served in the military and were honorably discharged, you likely have VA loan eligibility.

FHA mortgage insurance premium FAQs

When can you drop PMI on an FHA loan?

FHA loans do not charge PMI. Instead, they require MIP, the FHA’s own brand of mortgage insurance premiums. Modern FHA loans require MIP for the entire life of the loan unless you put 10 percent or more down. In that case they go away after 11 years. For FHA loans closed before June 3, 2013, MIP expires after the loan balance reaches 78 percent of the home’s value.

What is FHA MIP?

FHA MIP is the Federal Housing Administration’s specific type of mortgage insurance. The FHA charges two types of MIP: An upfront fee that equals 1.75 percent of your loan amount and an annual fee that equals 0.85 percent of the loan amount for 30-year loans with 3.5 percent down.

Does FHA require PMI without 20 percent down?

FHA loans always require MIP. If you put 20 percent down, you’d still pay upfront MIP and annual MIP for at least 11 years. If you put 20 percent down on a conventional loan you shouldn’t need to pay any PMI.

Can PMI be removed from an FHA loan?

MIP can be removed from some FHA loans. If you put 10 percent or more down, MIP will expire after 11 years. If you closed your FHA loan before June 3, 2013, your MIP will expire once your loan amount falls to 78 percent of your home’s FHA-appraised value.

Can I cancel PMI after 1 year?

Most conventional lenders require PMI until the loan’s principal balance falls to 80 percent of the home’s value. If you can reach this threshold in one year, then you can cancel PMI after a year. This isn’t true with FHA loans which require MIP throughout the loan term for most borrowers.

How soon after closing can you remove PMI?

PMI on a conventional loan does not have a set expiration date. Instead, it’s required until you pay the mortgage balance down to 80 percent of the home’s value. You can reach this threshold sooner by making extra payments. An FHA loan’s MIP, which resembles conventional PMI, lasts until you pay off the home — unless you put down 10 percent or more in which case MIP expires after 11 years.

Do any lenders specialize in FHA-to-conventional refinances?

Almost all lenders offer FHA-to-conventional refinances. Conventional loans are the most common loan type for residential real estate.

Can you take cash out when removing mortgage insurance?

It is possible to take cash out when refinancing to remove mortgage insurance. Cash out eligibility depends a lot on your home equity. You’d need to leave 20 percent of your equity in the home. To get 20 percent cash out, you’d need to have 40 percent in equity.

How can I get rid of PMI without 20 percent down?

Typical conventional loans require PMI unless you put 20 percent down. However, a few lenders will waive PMI in exchange for a higher interest rate. This approach may cost even more than paying PMI unless you refinance out of the higher rate.

How is mortgage insurance (MIP) calculated by FHA?

All FHA loans require 1.75 percent of the loan amount as upfront MIP. Annual MIP can vary from 0.45 percent to 1.05 percent depending on your loan amount, loan term, and down payment amount. If you get a 30-year loan and make the FHA’s minimum down payment of 3.5 percent, your annual MIP would add 0.85 percent of the loan amount per year.

Does FHA mortgage insurance go down every year?

If your loan balance goes down — as it should — every year, your FHA MIP will go down, too. This happens because MIP is charged as a percentage of your loan balance. You’ll pay a premium based on your original loan amount only in the first year.

Does FHA mortgage insurance ever increase?

The FHA changes its MIP rates from time to time. But these changes apply only to new FHA loans. Existing FHA loans keep their existing MIP rates and policies.

Is paying PMI or MIP worth it?

Yes. To avoid MIP or PMI, you’d need to save up a 20 percent down payment. Meanwhile, as you save money, house prices may be increasing. PMI and MIP allow you to buy sooner by lowering your down payment target.

Making a plan to get rid of FHA mortgage insurance is a great financial decision

When you’re buying a home, you’re mainly focused on getting into a place where you can set down roots and build a solid future. The down payment can be a big hurdle so high FHA PMI costs can be a worthwhile trade-off.

But now that you’re settled in, you might want to get rid of those FHA mortgage insurance premiums so you can put that money into savings, your child’s college fund, or toward high interest credit card debt.
Even if you can’t cancel your mortgage insurance now, you can make a plan for how you’re going to do it.

Check today's rates and start your MIP-eliminating refinance here (Sep 16th, 2024)

The post How to Get Rid of PMI on an FHA Loan | No Refinancing 2024 first appeared on My Mortgage Insider.

Private mortgage insurance (PMI) is usually between 0.19% and 1.86% of your mortgage balance. And you sometimes need to pay an upfront premium on closing, too.

But how much you have to pay will depend on the type of mortgage you choose, how much you put down, and — with some loans — your credit score.

Private mortgage insurance (PMI) is normally needed if you make a down payment on your loan that’s less than 20% of the home’s value.

Read on to discover:

• What is PMI?
• The different rates for different types of mortgage
• Which loans take your credit score into account and which don’t
• How to calculate your PMI
• Is PMI worth it?
• 4 ways to avoid PMI

What is PMI?

First, we need to clear up some jargon. PMI is technically the term for mortgage insurance paid on conventional loans. When government-backed loans charge mortgage insurance, it’s officially called mortgage insurance premiums (MIPs).

But most people nowadays don’t differentiate between the two. And we’re going with the flow and calling them all PMI.

Not all mortgage insurance is bad

Many homeowners hate PMI because they have to pay for it, even though it gives them no immediate benefit. It exists to protect the lender in the event you default and end up in foreclosure.

But PMI’s bad reputation isn’t wholly deserved. It’s often the only way you can get on the first rung of the homeownership ladder — unless you have enough savings to make a 20% down payment.

And those who complain about it frequently find they make way more through rising home prices than PMI costs them.

The different rates for different types of mortgages

The rules that govern how much you pay for PMI can be quite complicated. So only bother to get your head around those of the following that you think you might choose.

Conventional loans

These are mortgages that aren’t backed by the government. So they are either offered privately or through Fannie Mae or Freddie Mac, which are government-sponsored enterprises, rather than the government itself.

There’s good and bad news for PMI. The good news is you don’t have to make an initial payment on closing. And that the starting annual rate is a very attractive 0.19% of the loan value.

But the bad news is that few pay such a low PMI rate. Lenders include credit scores in their PMI calculations for conventional loans. And borrowers with only fair credit (580-669, according to FICO’s definition) could find that annual charge is sky-high — assuming they can get approved at all.

Conventional loans: The mortgage insurance math

The top rate for mortgage insurance on a conventional loan is 1.86%. On a $250,000 loan that would be $4,650 in your first year, which is $387.50 monthly.

On the other hand, those who have stellar credit scores and exceptionally sound finances could pay that ultralow starting rate of 0.19%. That comes in at $475 a year or $39.58 a month on that $250,000 loan.

If we take a middling figure of 1%, that would be $2,500 a year or $208.33 a month.

All those are rough figures. They partly depend on your mortgage interest rate and other factors. But we’ll tell you how to calculate yours with a bit more precision in a minute. Just recognize that you won’t know for sure until you get preapproved by a mortgage lender or request a loan estimate.

Of course, most homebuyers pay somewhere between those two extremes. But you can see why borrowers with lower scores often shun conventional loans, and instead frequently turn to other loan options, like FHA loans.

FHA loans

These are government-backed loans, which means a portion of your borrowing is guaranteed by the Federal Housing Administration.

The FHA ignores your credit score when it calculates your PMI (or, technically, your MIP). So it’s way friendlier to those with only fair credit.

But, typically, you have to pay a one-time super-premium of 1.75% of the loan value when you close. And, after that, 0.85% annually, payable monthly.

For our $250,000 loan, that’s $4,375 on closing and a $2,125 annual premium — or $177 a month. You’d need to be a pretty good borrower to get such a low monthly payment with a conventional loan.

But there’s a catch. With conventional mortgages, you can stop paying PMI when your loan balance falls to 80% of your home’s original purchase price. But, with FHA ones, you remain on the hook for the entire life of the loan unless you move home or refinance.

USDA loans

There are two relevant good points about this program:

1. You don’t need to make a down payment. Literally nothing, though you may get a better mortgage rate if you can put down something.
2. PMI (MIP) costs are lower than for FHA loans and many conventional ones.

The typical PMI charges are 1% on closing and 0.35% annually. For our $250,000 example loan, that’s $2,500 on closing and $875 annually ($72.92 monthly).

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

VA loans

Another government-backed program, this time managed by the Department of Veterans Affairs. The program has some unique characteristics:

1. Zero down payment
2. Low mortgage rates
3. No continuing PMI or MIP

Take note of the word “continuing.” While you won’t have to make regular monthly mortgage insurance payments, there is an initial payment due when closing your home purchase. It’s called the VA funding fee — rather than mortgage insurance — but it serves the same purpose.

So how much is the funding fee? The first time you use the program, it’s 2.3% of the loan amount and less if you choose to make a 5% or 10% down payment. After that, it’s 3.6% for each subsequent loan. But, again, lower rates apply with a down payment of 5% or 10% and higher.

For our $250,000 example loan, that’s $5,750 on closing with zero down on your first loan. Sounds a lot? Not when you remember you won’t spend a penny more on PMI.

Not sure if you’re eligible for a VA loan? Learn more here.

How to calculate PMI

In theory, calculating PMI is easy. You just do what we did in our examples: Take the loan value and multiply by x%, with x the relevant mortgage insurance rate.

That’s easy for FHA, VA, and USDA loans because each of those has its own flat-rates. But it’s more complicated for conventional mortgages because your credit score and other factors are going to play a part in the math.

So, with these conventional ones, you can’t be certain how much your PMI premiums will cost you until you actually apply to multiple lenders and receive quotes.

But you probably have a fair idea of your credit score and down payment. And, if you have 800+ credit and 10% down, you might assume you’re going to pay the lowest rate (0.19% annually) or close to it. Meanwhile, if your is 620-640, you might expect to pay the highest (1.86% annually) or close to it. And, if your score is somewhere close to the middle, you could use 1% as a rough guide, while expecting the final number to be a bit higher or lower.

How to figure out your entire mortgage insurance payment

The key figure you need to know before signing a mortgage loan agreement is how much your total monthly payments will be.

You’ll have to allow more for maintenance and repairs. And you may need to add some additional monthly costs, such as homeowners’ association fees (if you’re buying in an HOA) and extra insurance if the property is susceptible to flooding, earthquakes, hurricanes, or other special risks.

But, for most homebuyers, the costs they need to know are:

• Principal and interest
• Private mortgage insurance
• Property taxes
• Homeowners insurance

Luckily, The Mortgage Reports has a suite of mortgage calculators that will give you a monthly payment breakdown. You can even add in your HOA dues manually. There’s one for conventional loans and three others specifically for FHA, USDA, and VA loans, as well as a refinance calculator.

Is PMI worth it?

The answer to that question largely depends on how quickly home prices are rising in the area where you want to purchase. What PMI essentially buys you is the ability to cash in on appreciating values before you’ve saved the lump sum needed for a 20% down payment.

Of course, it brings other homeownership benefits, too. But, from a financial standpoint, it’s that early ability to benefit from home price inflation that’s key. Suddenly, you see rising real estate prices as a plus, rather than something to watch with dread.

Check out your local market

So, if you want to buy somewhere that currently has stagnant prices or even falling ones, you may prefer to wait until you’ve saved up a 20% down payment before buying. Even then, you might hesitate.

But if home prices are shooting up there, PMI could turn out to be a very sound investment — with a handsome return.

At the time of writing, home prices are rising nationwide. But that covers some extreme local variations. So don’t look just at national figures. Investigate the market where your next home will be.

5 tips to avoid paying PMI

1. Make a 20% down payment

But that might not be an option for you. So what are the other four?

2. Pay down your mortgage

The federal Homeowners Protection Act (HPA) provides rights for homebuyers over the termination of PMI payments. But it does not apply to FHA and USDA loans — and isn’t needed for VA ones.

Under that law, your PMI payment obligations must automatically terminate when your mortgage balance is scheduled to reach 78% of the original valuation of your home. The only condition is that your payments must be current at that time.

This has nothing to do with rising home prices. It’s your home’s original appraised value on purchase (or the contract sales price, whichever is lower) that’s used. And the date is exactly predictable: You can find it on your amortization table.

You can also request in writing that PMI payments stop when that figure reaches 80%. But that earlier cancellation brings some extra conditions that don’t apply to automatic terminations at 78%.

These include: A good payment history. No second mortgages. So no home equity loan or home equity line of credit (HELOC). You may be asked for a fresh appraisal to confirm that your home hasn’t lost value since you bought it.

If your PMI payments are a burden, your payments are up to date and you can fulfill those conditions, it may be worth the hassle of making your application.

3. Pass the halfway point of your home loan term

Your PMI must also be terminated when you reach the midpoint in your mortgage term. (Remember, this does not apply to FHA and USDA loans). The Consumer Financial Protection Bureau explains:

“There is one other way you can stop paying for PMI. If you are current on payments, your lender or servicer must end the PMI the month after you reach the midpoint of your loan’s amortization schedule. (This final termination applies even if you have not reached 78 percent of the original value of your home.) The midpoint of your loan’s amortization schedule is halfway through the full term of your loan. For 30-year loans, the midpoint would be after 15 years have passed.”

4. Refinance

If you’ve come into some money or your home’s value has appreciated enough for you to attain 20% equity, then refinancing can enable you to remove PMI.

Of course, that’s likely to come with closing costs. But, with mortgage rates the way they’ve been recent, you might be able to reduce your monthly mortgage payment at the same time. You may well end up with a lower rate and lower monthly payments, even leaving aside your PMI savings.

And you can then refinance from any type of mortgage to any type of mortgage for which you qualify. Even FHA loans don’t have PMI if you put down 20%.

5. Piggyback mortgages

You may be able to avoid PMI altogether, provided you’ve managed to save a 10% down payment. You can do this through a piggyback mortgage, also known as 80/10/10 financing (though you can find 75/15/10 versions if you’re buying a condo).

Have you guessed how this 80/10/10 business works? You have your 10% down payment and you borrow another 10% as a second mortgage, often a HELOC. That means your main mortgage is only 80% of the home’s value and you’re effectively putting down 20%.

Obviously, everybody would be doing this if there weren’t some downsides. And those include:

1. Typically, a higher rate on the smaller mortgage.
2. It’s harder to qualify. You’ll need good credit and not too many other debts.
3. It can be more difficult to refinance.

Still, some find this an effective way of avoiding PMI. You can learn more here.

The bottom line

PMI isn’t the evil that many homebuyers seem to think. But you have to look at it as an investment: the price of benefiting from rising home prices. And like all investments, you need to run your figures and assess your risks.

The post How much is PMI (private mortgage insurance)? first appeared on My Mortgage Insider.

-Dave

A: Hi Dave. Thanks for the question. First, let’s start with the main difference between the FHA and conventional loan programs.

Click here to check today's interest rates (Sep 16th, 2024)

What is the difference between an FHA and conventional loan in cost and benefits?

For home buyers with limited funds for a down payment, both FHA and conventional loans are available to help facilitate the purchase of a new dwelling.

FHA loans are insured by the U.S. Federal Housing Administration and are offered by FHA-approved lenders.

Conventional loans are not government-insured and are available through many banks, credit unions, and other mortgage lenders.

You may qualify for both, but there are real differences between them, so take the time to understand the advantages and disadvantages of each before making a decision.

Click here to see how much home you can afford now (Sep 16th, 2024)

What is a Conventional 97 loan?

Most people have been told that they can’t get a conventional mortgage with less than 10% — or even 20% — to use as a down payment, but that’s not true.

The Conventional 97 mortgage program allows you to put down as little as 3% for a down payment and then borrow the remaining 97%. The 3% can be sourced from savings, grants, Community Seconds mortgages, and even gift funds. The goal of the Conventional 97 loan program is to help people make their home ownership dreams come true, even if they don’t have lots of cash on hand. Conventional 97 loans require Private Mortgage Insurance (see details below).

Here’s what you need to know about Conventional 97 loans:

• You can get a Conventional 97 loan with as little as 3% of the purchase price of a home.
• You must be a first-time home buyer, though you qualify for this as long as you haven’t owned real estate property in the last three years.
• You can qualify for a Conventional 97 loan with a credit score that’s as low as 620. There are limits to the value of the property for which a Conventional 97 loan can be used. This is based on the conforming limit for the county where the home is located.
• You must take out a 30-year fixed-rate mortgage.
• The property must be owner-occupied.
• The property can be a single-unit family home, co-op, condominium or a unit within a planned unit development.
• You will be required to purchase private mortgage insurance (PMI) and continue paying premiums until you have 78% equity in your loan.

Click here to verify your home buying eligibility (Sep 16th, 2024)

What is an FHA loan?

FHA loans are insured by the Federal Housing Authority. These government-backed loans have been available since the mid-1930s for the purpose of helping first-time home buyers with little available cash and lower credit scores to qualify for a mortgage.

Down payments can be as little as 3.5%, and mortgage lenders (who must meet strict requirements and are limited in the closing costs they impose) are more likely to offer attractive terms because the loans are guaranteed by the government.

Your down payment can be sourced from savings or investments, grants, gifts, and employer programs.

The goal of the FHA loan program is to help people who would not typically qualify for mortgages to become homeowners.

Here’s what you need to know about FHA loans:

• You can get an FHA loan with as little as 3.5% of the purchase price if your credit score is at least 580.
• FHA loans do not require you to be a first-time home buyer.
• FHA loans have limited closing costs.
• Borrowers with credit scores between 500 and 579 are also eligible for an FHA loan, though these loans require a 10% down payment.
• FHA loans are subject to maximum amounts determined by type of home and location of the home.
• FHA loans require additional pre-purchase home inspections.
• The property must be the borrower’s primary residence and can be a single-unit family home, co-op, condominium or within a planned unit development.
• You will be required to pay an upfront mortgage insurance premium (UPMIP) of 1.75% of your base loan amount, which must be either paid entirely in cash or financed into the loan. Following this payment, you will continue paying annual Mortgage Insurance Premiums (MIP) for the life of the loan.
• Borrowers must have a debt-to-income ratio of less than 45%.
• You must be employed and have an income history of at least two years.
• FHA loans are assumable.

What are the dollars and cents differences between FHA and Conventional 97?

If all things were equal, this would be a simple question. However, there are so many potential variables, including your homebuying circumstances and goals, that the answer is complicated.

If your primary cost concern is about how much you’re going to pay out of pocket to get yourself into a home, and you’ve got a solid credit score, then the Conventional 97 is the way to go. Not only are you able to put down as little as 3% (compared to the FHA’s 3.5%), but you also won’t be required to pay 1.75% for the upfront mortgage insurance premium and there’s a good chance your private mortgage insurance is going to cost less too.

Plus, there’s the additional benefit of having your Private Mortgage Insurance automatically canceling once your loan-to-value ratio reaches 78%.

But things take a quick turn if your credit score falls below 620.

Click here to get pre-qualified to buy a home today (Sep 16th, 2024)

When is an FHA loan the right choice?

At first glance, the Conventional 97 loan seems like the clear winner for borrowers with sparse cash to spare. But that’s only when all things are equal.

Once you introduce a lower credit score, all of the variables start to change. Here’s why: The lower your credit score, the higher your interest rate is likely to be for a conventional loan. Once your credit score falls below 620, you no longer qualify for the Conventional 97 loan.

Private mortgage insurance generally costs more than FHA mortgage insurance payments for borrowers with credit scores under 720.

All of this means that if your credit has been negatively impacted, the FHA loan may not only be your better option from the standpoint of your interest rate, it may also be the only one of the two options for which you are eligible.

The hidden benefit of an FHA loan

Whether you’re purchasing a starter home or your dream home, smart buyers will look to the future and whether a property has resale value. That’s where FHA loans offer a hidden benefit not available with conventional loans: the ability for the next buyer to assume the existing FHA mortgage.

As long as a home buyer qualifies for the existing terms of an FHA mortgage, they are able to assume the existing loan and its original interest rate. That means that as interest rates increase, your FHA loan makes your home a much more attractive option. Conventional loans do not provide this benefit.

And if you’re worried abotu FHA lifetime mortgage insurance, keep in mind that you can refinance out of FHA to cancel MI as long as mortgage rates stay at or near current levels. If rates rise too much, a refinance would increase your rate, negating your savings.

Click here to check today’s FHA or Conventional 97 rates (Sep 16th, 2024)

Is there a difference in what kind of home you can buy?

FHA and conventional 97 loans limit the amount of money you can borrow, though these limits are determined by different factors and sources.

The FHA sets its limits based on the county in which the home being purchased is located, while conventional loan limits are subject to the conforming loan limit set each year by the Federal Housing Finance Agency.

Additionally, the FHA requires an additional appraisal for homes being purchased using an FHA loan. Though this may feel like an added layer of bureaucracy, the agency’s higher standards are based on adherence to local code restrictions, as well as ensuring the safety and soundness of construction.

FHA loans are not available for homes being sold within 90 days of a prior sale.

Finding the right low down payment mortgage solution for you

With so many factors potentially affecting your personal situation, and so many advantages to each type of loan, choosing the right option can be a challenge.

The good news is that there are plenty of loan professionals who are eager to help you find the solution that’s tailor-made to your needs.

Click here to get a pre-approval now (Sep 16th, 2024)

The post FHA vs Conventional Loan: Which Is Better? first appeared on My Mortgage Insider.

To the surprise of many homebuyers, there is more than one way to obtain PMI. One of those PMI alternatives is Lender Paid Mortgage Insurance, or LPMI.

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

What is Lender Paid Mortgage Insurance (LPMI)?

Lender Paid Mortgage Insurance is a form of PMI that is paid for by the lender via a one-time fee, rather than by the borrower monthly. Some form of PMI is required whenever a borrower puts less than 20% down on a conventional loan.

The term “Lender Paid Mortgage Insurance” is a bit misleading, however. The lender does not pay the borrower’s mortgage insurance premium out of the goodness of its heart. Rather, the lender raises the interest rate on the mortgage to generate enough profit to pay the mortgage insurance company the required one-time fee.

The party who ends up paying the cost of LPMI is ultimately the borrower, since it’s the borrower’s interest rate that is increased. For this reason, LPMI is sometimes referred to as Single Premium mortgage insurance.

The reason it is often called “lender paid” is that the borrower is not allowed to pay the one-time premium directly out of their own funds. The funds must come from the lender, or from another party, such as the builder or seller.

Some lenders offer a PMI option where the borrower pays the one-time premium out of their own funds. This is known as either Borrower Paid Mortgage Insurance, BPMI, or Borrower Paid Single Premium mortgage insurance. If you want to buy out your own mortgage insurance to avoid the LPMI rate increase, ask your lender about their BPMI programs.

How does LPMI work?

What’s not readily apparent to homebuyers is that the higher the interest rate on your mortgage, the more profit is available to the lender. So, let’s imagine that you accept an interest rate on your mortgage that is 0.50% higher than market rates. The rate increase generates an extra $5000 in profit on that loan.

Let’s also imagine that a PMI company agrees to accept a one-time payment of $5000 in lieu of receiving a monthly PMI payment from the borrower.

The lender could opt to take that extra $5000 in profit and essentially prepay the PMI premium. The borrower ends up with a higher rate, but no monthly mortgage insurance fees.

Is LPMI better than FHA?

Federal Housing Administration (FHA) loans have been a great tool for homebuyers over the past few years. If not for FHA, many would be locked out of homeownership. However, FHA is increasing fees again as of April 1, 2013, to steady its troubled financial position. LPMI might become a more attractive option.

It’s true that the interest rate on an LPMI loan would be higher than an FHA loan. But FHA has very high monthly mortgage insurance costs, and also an upfront fee of 1.75% of the loan amount. FHA mortgage insurance negates any savings from a lower interest rate.

Still, FHA may be a better option for some homebuyers. FHA allows for as little as 3.5% down, compared to LMPI’s 5% down requirement. FHA also allows for more seller contributions toward closing costs. Leniency from FHA means a lot less out-of-pocket expense for FHA borrowers.

In addition, borrowers can qualify for an FHA loan with a lower credit score.

As shown in the chart below, each borrower would have to analyze their available funds, their monthly payment tolerance, and their credit rating to opt for LPMI or FHA.

Payments & out-of-pocket expense: LPMI vs monthly PMI vs FHA

Which mortgage option comes out on top? Let’s look at an example of a $250,000 home purchase.

LPMI seems to come out on top based strictly on monthly payments. But that’s not the whole story. LPMI has its advantages as well as disadvantages depending on other factors.

LPMI pros & cons

LPMI pros

• Homebuyers can put as little as 5% down on a home, rather than the standard 20%, yet avoid monthly PMI
• The initial monthly payment for LPMI loans is often lower than that of monthly PMI or FHA financing
• When rates are low, homebuyers can get a great rate despite the LPMI rate hike
• Those who qualify for monthly PMI probably also qualify for LPMI
• As FHA costs increase, LPMI will become cheaper in comparison.

LPMI cons

• Your interest rate remains higher through the life of the loan.
• With monthly PMI, you can cancel monthly PMI when your loan reaches 80% of the home’s value.
• A fairly high credit score is needed to qualify for LPMI
• LPMI requires higher out-of-pocket costs than FHA
• LPMI is not offered by every lender

How long will you keep the mortgage?

Even though the monthly payment on an LPMI loan might be cheaper initially, it might cost more than monthly PMI if you keep your loan for 30 years. This is because you can cancel monthly PMI when your loan reaches 80% Loan-to-Value (LTV), but you can’t lower your LPMI interest rate at any time without refinancing. Let’s look at a cost comparison of a person who keeps their mortgage for 10 years and 30 years. All scenarios assume a 5% down payment:

Should you choose LPMI?

The main benefit to LPMI is simply lower monthly payments at the beginning of the mortgage when you’re first starting out on your homeownership journey. It’s also nice to know that you won’t see that pesky mortgage insurance payment on your monthly statement for the first 7-10 years of your mortgage. It’s a great program for those who want a low monthly payment and don’t mind a slightly higher interest rate. Talk to your loan professional, and see if a loan with Lender Paid Mortgage Insurance is right for you.

All PMI scenarios are based on a $250,000 purchase price and value, 5% down, 740 credit score, no HOA dues, and property in WA. 30-year fixed rate 1^st mortgage with principle and interest payment. FHA scenario based on $250,000 purchase price and value, 680 credit score, 3.5% down, no HOA dues, and property in WA. Mortgage payments are rounded to the nearest dollar. Rates are based on real-time available rates as of 3/19/13.

Lifetime MI cost calculation: $132.60 x 89 months (time at which loan reaches 80% LTV)

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

The post When Lender Paid Mortgage Insurance Makes Sense first appeared on My Mortgage Insider.

FHA has typically been the mortgage loan of choice for buyers with less-than-perfect credit, smaller down payments and higher debt-to-income ratios.

But the tide is shifting. Conventional loan programs can also help buyers who don’t have a perfect credit profile save money.  

Let’s compare these programs side by side to see which one would work best for you.

Click here to see which loan program is right for you.

What is an FHA loan?

FHA loans have been making home-buying easier since the Great Depression. FHA stands for Federal Housing Administration, which is a government agency.

But the federal government does not lend you money when you get an FHA loan. Instead, the FHA insures your home loan. (If a borrower defaults on an FHA loan, the FHA covers the lender’s losses.)

So how does this government backing help home buyers? With FHA mortgage insurance behind your loan, a lender can offer lower interest rates even if you don’t make a huge down payment or have excellent credit. 

In exchange for this extra security, you’ll pay FHA mortgage insurance premiums (MIP) — both upfront and each year for as long as you have the loan. Mortgage lenders add the cost of MIP to your monthly mortgage payment.

Despite this added cost for FHA mortgage insurance, an FHA loan could still save you money if it gives you a lower interest rate compared to a conventional loan.

What is a conventional loan?

A conventional loan does not come with insurance from a government agency. As a result, the borrower’s credit history, down payment size and debt-to-income ratio (DTI) can have a bigger impact on the loan’s mortgage rate.

Homeowners who buy with conventional loans still have to get mortgage insurance if they put less than 20% down. But unlike the FHA’s mortgage insurance, conventional private mortgage insurance (PMI) can be canceled once you’ve paid down the loan balance to 80% of your home value. 

You no longer need a huge down payment to get a conventional mortgage with PMI. In fact, you could put less down on a conventional loan (3%) than the FHA’s minimum down payment requirement of 3.5%.

Even though the federal government does not insure conventional loans, it still influences how these loans work. Two government-sponsored enterprises, Fannie Mae and Freddie Mac, set the rules for conventional loans.

FHA vs conventional loan requirements

A lot of buyers can decide between FHA vs. conventional borrowing by finding out which loan requirements they can meet.

Here are the numbers: 

Borrowers should remember these numbers are not always absolute, and the loan requirements can affect each other. 

For example, borrowers who exceed requirements for DTI and down payment may be able to qualify even if they fall a few points short of the loan’s minimum credit score requirement.

For conventional loans, a borrower who barely meets the minimum credit score and DTI standards may need to make a larger down payment to qualify.

When does an FHA loan make sense?

An FHA loan makes sense for home buyers who won’t get a competitive rate on a conventional loan for one or more of the following reasons: 

• Credit score is too low
• Debt-to-income ratio is too high
• The borrower needs to make a low down payment 

The extra security of FHA insurance — which would protect the lender after a foreclosure — allows the lender to extend favorable mortgage rates even when borrowers are too risky for conventional lenders.

Yes, the cost of FHA mortgage insurance will continue throughout the life of the loan, unless the borrower puts 10% or more down. (In that case, FHA PMI expires after 11 years.)

But these FHA premiums become a good investment if you couldn’t buy a home without them.

And, borrowers can eliminate FHA PMI by refinancing out of their FHA loans later. Once the loan’s balance falls below 80% of the home value, a homeowner can refinance into a conventional loan with no private mortgage insurance.

When does a conventional loan make sense?

A conventional loan makes sense when the homebuyer has the credentials — the credit history and the down payment money — to score a lower mortgage rate without the FHA’s help.

When you look at the qualifying credentials for a conventional loan — a 3% down payment and a 620 FICO — they look attainable. But remember, these are the minimums for qualifying. Qualifying for a loan doesn’t mean you’ll qualify for a competitive interest rate. 

An ideal conventional loan applicant looks more like this:

• A credit score above 680
• A debt-to-income ratio below 36%
• The ability to exceed the minimum down payment of 3%, while still paying closing costs

Depending on the lender, a borrower could need a credit score in the mid-700s or higher to qualify for a 3% down conventional loan with a low interest rate.

It works the other way around, too: Someone who has the minimum FICO score of 620 may need to put 8% or 10% down to get a competitive conventional loan rate.  

But, if you can qualify for a low conventional rate, you’ll save compared to an FHA loan with the same rate, mainly because you won’t be paying the FHA’s 1.75% upfront mortgage insurance premium. Plus, your monthly mortgage insurance payments would eventually go away on their own. 

FHA vs conventional loans for first-time homebuyers

Shoppers tend to associate FHA loans with first-time homebuyers, but this type of mortgage isn’t designed only for first-time buyers.

It just so happens first-time buyers often need the FHA’s backing because they haven’t had a chance to establish a good credit history or to save up a large down payment.

In reality, FHA loans can help anyone achieve homeownership, even home shoppers who have owned homes before, and even if they already own real estate (as long as the new home purchase will be their primary residence).

Conventional loans can help first-time home buyers, too

Modern-day conventional loans also include loan options that can help first-time homebuyers and others who may struggle to qualify:

• Freddie Mac Home Possible: A 3% down loan that lets borrowers document income from co-borrowers who don’t live with them. This income boost helps buyers qualify for single-family home loans more easily. You’d need to earn 80% or less of your area’s median income to participate 
• Fannie Mae HomeReady: This 3% down loan option lets you supplement your income with rent you receive from a roommate or boarder who will live in your home, boosting your loan eligibility

These special conventional loan options can help borrowers who need a little help qualifying. They provide an alternative to FHA loans and their permanent mortgage insurance premiums.

Even though these conventional options can help with income qualifying, they still require higher credit scores than FHA loans. Borrowers with lower credit scores — FICOs between 580 and 620 — will still do better with an FHA loan.

Variety of options adds to conventional loan appeal

Conventional loans include a wide variety of loan options. Along with the HomeReady and Home Possible loans for buyers who need help qualifying, most lenders can also offer:

• Conventional 97: Another 3% down loan option but with no income limits, unlike Home Possible and HomeReady
• Conventional 95: A 5% down loan that will require monthly mortgage insurance premiums. The higher down payment can lower mortgage rates and monthly payments, though
• Piggyback loan: These loans let you avoid monthly mortgage insurance even if you have only 10% to put down in cash. They work by pairing your 10% down with another 10% down from a second mortgage
• Jumbo loan: Also known as non-conforming loans, jumbo loans can exceed the conventional loan limit in your area and will usually require a larger down payment and a stronger credit profile

Conventional loans also offer more choices for loan terms when compared to FHA loans.  FHA offers only 15- and 30- year terms while conventional loans can offer 10- and 20-year terms, along with 15- and 30-year terms. 

Loan terms make a big difference in how much interest you’ll pay over the life of your loan. Shorter terms require higher monthly payments but less long-term interest.

Click here to check your eligibility for a conventional loan.

Conventional loan vs FHA FAQs

What is an FHA loan?

An FHA loan is a type of mortgage in which the Federal Housing Administration insures the lender in case the borrower defaults. With FHA insurance protecting a lender, it can offer loans with lower interest rates even to borrowers with lower credit scores and low down payments.

What is a conventional loan?

A conventional loan does not have mortgage insurance from the federal government, unlike FHA, USDA, and VA loans. Instead, borrowers who put less than 20% down will buy private mortgage insurance to protect the lender. Conventional loans tend to cost less than FHA loans for borrowers with a strong credit profile.

What is a conventional loan vs FHA?

Home buyers often choose between conventional vs FHA loans because both these types of mortgages work for borrowers in all U.S. locations and for borrowers with any income. Federally backed USDA and VA loans, on the other hand, have additional criteria, such as military affiliation (VA loans) or rural locations and moderate-income levels (USDA loans).

Which is a better loan: FHA or conventional?

Both loan types have strengths and weaknesses. A better question is which loan is better for you as the borrower? If you couldn’t qualify for a conventional loan, or if your loan officer says your conventional loan rate would be significantly higher than an FHA rate, it’s best to go with an FHA loan, despite its higher mortgage insurance premiums.

What is the downside of a conventional loan?

Since the government does not insure conventional loans, borrowers have to qualify for low mortgage rates all by themselves. Borrowers who barely meet the minimum requirements for a conventional loan typically pay more than borrowers with excellent credit and a large down payment. 

Why would you choose FHA over conventional?

Borrowers should choose an FHA loan when its mortgage rate is significantly lower than their best rate for a conventional loan (though make sure to factor in the additional cost of mortgage insurance premiums when comparing). Borrowers with average credit profiles and low down payments often find themselves in this financial situation. 

Do sellers prefer conventional or FHA?

Sellers may prefer conventional loans, simply because the more rigorous standards and regulations with FHA financing can make the process more complicated. For example, the FHA does enforce minimum property standards. So a home with exposed lead paint, for example, wouldn’t pass the FHA’s inspection.

What is the advantage of an FHA loan over a conventional loan?

FHA loans help protect lenders from the risks of loaning money to home buyers with low down payments, higher DTIs, and lower credit scores. With a conventional loan, a lender would have to mitigate its risk by charging a higher interest rate. With FHA loans, lenders can offer lower mortgage rates even to higher-risk borrowers. 

Are FHA loans more expensive than conventional?

For a borrower who could qualify for a competitive mortgage rate on a conventional loan, an FHA loan would cost more because of its higher mortgage insurance premiums. However, for a borrower who’d pay a higher rate on a conventional loan, an FHA loan could cost less, even with the higher insurance premiums. If you’re not sure where you stand, ask a loan officer to break down the costs for you.

FHA vs conventional: The best option depends on the borrower

Borrowers with great credit, good income, and money in the bank should seriously consider using a conventional loan instead of an FHA loan. For this type of borrower, it doesn’t make a lot of sense to incur the extra expense of an FHA loan.

However, borrowers who have had credit issues in the past or have limited assets may qualify for FHA financing only. After all, the FHA loan program exists to allow people to buy homes who normally wouldn’t be able to.

Talk to your mortgage professional to determine which option is better for you. If you qualify for both loan programs, have your loan officer draw up personalized scenarios taking into consideration initial costs and ongoing costs. 

With your two options in black and white, you’ll be able to make a great educated decision whether FHA or conventional financing makes the most sense for your home buying goals.

Click here to see which loan program is right for you.

The post What’s Better: FHA or Conventional? first appeared on My Mortgage Insider.

Mortgage insurance just helps the lender have reassurance in case you default on the loan, and it can add a hefty price sometimes onto your monthly loan bill.  However, there are options in mortgage insurance out there, and one of them that can help you if you are in a pinch for money. It’s called the lender-paid mortgage insurance (LPMI).

“In essence, it is wrapped into the interest rate. But you have different options with this type of insurance,” says Jeremy David Schachter, branch manager and mortgage advisor at Pinnacle Capital in Phoenix. “There are advantages and disadvantages to going this way.”

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

How does lender-paid mortgage insurance work?

Your mortgage lender pays the mortgage insurance premium in a lump sum upfront. He/she forwards that cost to you with a higher interest rate on the loan – which usually would be about a quarter of a percentage point – he says.

“But remember that the mortgage insurance won’t fall off once you get to 20 percent. It was already put into the loan, and you pay for it continually until you sell or refinance,” Schachter says.

Choosing this direction can be a good choice depending on how long you will stay in your home.

“If you are an older couple and this is your final home, lender-paid mortgage insurance might not be the way to go,” he says.

Some of the situations where it could be a good thing includes:  you plan on refinancing in a few years; you are getting a short-term mortgage; you need a smaller monthly mortgage payment; and you desire a bigger tax deduction.

If you want to head toward borrower-paid mortgage insurance, then the best scenarios can include: you will stay in your home a long time; you will choose a long-term mortgage; you believe the home’s value will increase;  and you decide on higher monthly payments so you can cancel the insurance as you reach the 20 percent down payment figure.

Advantages of lender-paid mortgage insurance

Lender-paid mortgage insurance does have the advantage that you will have more interest to write off on your taxes*, Schachter says. Taxpayers who itemize their tax deductions and have paid or accrued mortgage insurance premiums on any contract written after January 1, 2007 are eligible to deduct insurance premiums, subject to certain income restrictions.

But despite any of the other advantages, most people just want a lower payment.

“I’ve been doing this for 15 years, and some people just want the lowest payment possible. That’s all that matters to them. But some people want the lowest rate even though the payment would be lower with a slightly higher interest rate. Each individual has their own house psychology,” he says.

A quarter percent higher can make some people cringe, he says.

Schachter actually closed on a mortgage for his own second home recently and chose lender-paid mortgage insurance.

“For my situation, I was worried about the lowest payment. Eventually, I want to refinance. But to get to 20 percent equity, it might take me a while. Home values are going up a little in this area, so I might make that quicker than I thought,” he says.

The interest rate you get in situations like this has a lot to do with whether you have a high credit score and how much down payment you can contribute.

Here’s an example from Schachter of a lender-paid mortgage insurance versus a monthly mortgage insurance premium:

$225,000 purchase, 10 percent down with a 740 FICO score
Monthly mortgage insurance at 3.875, with APR of 4.2375
Lender paid mortgage insurance at 4.125 percent, APR 4.213

“The rate was .25% higher on lender-paid mortgage insurance. All that interest is rolled into the interest rates, so there isn’t any mortgage insurance in the payment. The savings was $107.00 per month compared to the borrower-paid mortgage insurance,” he says.

If this borrower had chosen the borrower-paid mortgage insurance, the monthly fee would have been $125 added on per month to the principal and interest.

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

This site does not give tax advice. See your tax professional for tax-related recommendations.

The post Lender-Paid Mortgage Insurance (LPMI): Why It Can Pay Off in Today’s Market first appeared on My Mortgage Insider.

The FHA loan was the go-to standard during the housing market crash. It offered a low down payment option in a time when lenders and PMI companies all but ceased lending without substantial money from the borrower into the transaction.

But FHA’s dominance is slowly diminishing. Many borrowers with 5% down are finding that PMI companies now offer affordable mortgage insurance, while FHA continually hikes fees.

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

Related: What’s Better: FHA or Conventional?

Matt Hackett, Underwriting Manager at Equity Now, a New York-based direct mortgage lender, points out just how costly the FHA loan program has become.

“There is a 1.75% charge for FHA loans which is not present on conventional loans,” says Hackett, speaking of FHA’s upfront mortgage insurance fee. He says that on a loan amount of $403,750, over $7,000 would be added to the loan.

Hackett goes on to talk about FHA’s annual mortgage insurance premium, or MI, which is broken up into 12 equal payments and paid monthly on all FHA loans. “One of the recent changes that caused FHA to be so much more expensive was making the annual MI last for the life of the loan. Conventional PMI drops off at 78% loan-to-value.”

On a $425,000 purchase price with 5% down, the borrower will save $154 per month and $50,000 over the life of the loan by choosing a conventional loan with PMI over an FHA loan, Hackett says.

In addition, private mortgage insurance companies have loosened up their guidelines to match those of Fannie Mae and Freddie Mac. In previous years, additional rules implemented by PMI companies, called overlays, kept many home buyers from using PMI.

So why is FHA still around?

The fact that PMI has become cheaper and easier begs the question: why does anyone choose an FHA loan?

According to Hackett, the borrower’s available cash has a lot to do with it. An FHA borrower is typically “someone who doesn’t have a 5% down payment as well as funds to cover the closing costs. FHA has a higher loan-to-value limit, requiring borrowers to only put down 3.5%, as opposed to the conventional 5% requirement.”

Credit scores also come into play. Hackett points out that a conventional loan with private mortgage insurance allows a 620 minimum score, while FHA allows a 500 score when putting 10% down. A 3.5% down payment is allowed on an FHA loan with a 580 score.

In addition, FHA may be the only choice if a borrower’s debt-to-income ratio, or the amount of his or her debt payments compared to income, is high. “A borrower whose debt-to-income ratio exceeds 50%, or in some cases 45%, may also need to apply for an FHA loan instead of conventional,” says Hackett.

In essence, anyone with good credit and income, and a 5% down payment should consider a conventional loan with PMI before assuming that FHA is the only way to go. After years of sitting on the sidelines, private mortgage insurance companies are back in the game. Hackett states, “Their changes have been to open the credit box back up to the point where they are competing for the higher credit borrowers.”

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

The post PMI Becomes Easier, FHA More Costly first appeared on My Mortgage Insider.

Mortgage insurance is there to help the lender – not the homeowner — with any losses just in case a borrower can’t pay the loan back. Typical payments will be monthly with an upfront fee required at closing.

PMI also applies to those who don’t have a home equity percentage of 20 percent in their house when they are getting a refinance loan, says Christian Durland, senior mortgage loan officer at CMG Financial in Greenwood Village, Colo.

“Mortgage insurance is unavoidable on the government side of things (except VA loans), too. Everyone has to pay in the pool. That’s how those loans continue on,” he said.

However, there are ways to avoid needing pay mortgage insurance with some mortgage types.

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

Types of mortgage insurance

FHA borrowers have what is called Mortgage Insurance Premiums (MIP). They first are charged 1.75 percent of the loan upfront at closing. Then, an annual MIP fee of about .85 percent of the borrowed amount is charged, usually paid monthly for the life of the loan.

Also, you don’t stop paying MIP if you finally pay off 20 percent of your home’s value. You either need to refinance to a conventional loan or sell the house.

Conventional loans use a different type of mortgage insurance called private mortgage insurance (PMI). Your PMI rate varies based on your loan-to-value ratio – which is the amount you owe on your mortgage compared to its value – and your credit score.

Those required to pay PMI can expect to pay between $30 and $70 per month for every $100,000 borrowed. While the extra monthly payments aren’t fun, they allow people to get into a house sooner that it would take to save up for a 20 percent downpayment.

For conventional loans, making a 20 percent downpayment will remove the necessity for PMI.But people really need to examine their own finances and see whether unloading all of their savings into a down payment is a smart move compared to putting down a less amount and paying PMI, Durland said.  

For those wishing to not have any PMI, here are a few suggestions:

Select Single Premium Policy

“This is one of my favorite ways of structuring PMI,” Durland said. “You make one lump sum payment at closing.”

This is a useful way of avoiding mortgage insurance payments, but it only works if you stay in your home or your loan for three years, he says.

For example, if the loan amount is $250,000 and you only put 5 percent down — $12,500 — PMI would cost 2.5 percent, or $6,200.

“That’s a sticker shock to some people. It is a big chunk of money. But if you factor in on that $250,000 loan, your monthly PMI would cost $175. Multiply that by five years, and you will be paying $10,000,” he says. “The $6,200 is cheaper if you can come up with the extra money.”
Durland states that every loan company can do a single premium policy, but there are misconceptions about it in the loan industry.

Find a low-downpayment conventional loan with no PMI

Not all conventional loans will require PMI even if you have a downpayment smaller than 20 percent. These mortgages will more than likely require a higher mortgage rate depending on the current market, your credit score, the size of your downpayment amount and the lender. Be careful before choosing these types of mortgages and talk with a tax advisor before doing so.

Lender paid mortgage insurance

Some lenders will pick up the cost of PMI. Instead of PMI, the lender charges a higher mortgage rate than the buyer putting 20 percent down. Depending on the lender paid PMI option, the payment could be lower than with buyer paid PMI, and the larger amount of interest paid is tax-deductible.

Pay the 20 percent down

While this option could mean saving up for a while longer, it makes it so you can get a conventional loan that doesn’t require mortgage insurance as has low mortgage rates.

Get a VA loan

If you qualify to get a VA loan, most lenders and finance experts would tell you to go in that direction. The VA loan offers a number of benefits like not requiring a downpayment and lower closing costs. Plus, the VA loan doesn’t charge any PMI because the government agency is guaranteeing the loan itself.

Take out a piggyback loan

If the borrower has 10 or 15 percent down, they can then take out a second loan to make up that 20 percent down. But remember that you’ll be paying two loans off each month.

“Most the time now, a single premium loan will outperform two loans every day. I show borrowers the single premium option, and it stops the piggyback options dead in their tracks,” he says.

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

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