JVM Lending Blog

Rates Shoot Up; Conventional Loan w/ 3% Down Payment vs. FHA?

30 Year Fixed Rate Loan at a Cost of One Point: 3.875%*

Rates shot up markedly yesterday for two reasons. First, a surprisingly large improvement in retail sales numbers sent investors away from bonds and into stocks, and this “flight from quality” always pushes rates higher. And secondly, there was simply an over-supply of mortgage backed securities hitting the market (more mortgages than usual hit the market on an especially bad day). This all implies that rates may edge back down (when supply gets absorbed).

Many borrowers are forced to take FHA financing because they have weak credit, limited cash, and/or high debt ratios. BUT, for borrowers whose only issue is limited cash, a Conventional loan with 3% down may be the better option (if credit and income are good).

A 3% down Conventional loan can be locked in at “no points” today 4.125% (vs. FHA’s 3.75% at no points), but the Conventional loan’s PMI rate can be as low as 0.88% (vs. FHA’s 1.15%, and soon to be 1.25%) and Conventional has no Up Front Mortgage Insurance Premium (vs. FHA’s 1%, and soon to be 1.75%).

ADVANTAGES OF 3% DOWN CONVENTIONAL
*Sellers Prefer “Conventional Offers” Over “FHA Offers”
*Buyers Can Get Out of PMI much sooner (when LTV hits 80%)**
*No Up Front Mortgage Insurance Premium (FHA’s will be 1.75% in April)
*PMI is lower that FHA’s MI (.88% vs. FHA’s 1.25% in April)

**FHA MI remains for a minimum of 5 years, and can only be removed when LTV is 78% of PURCHASE PRICE.

DIS-ADVANTAGES of 3% DOWN CONVENTIONAL
*Rates are higher than FHA, and higher than standard conventional loans**
*Conventional loans are not “assumable” (FHA loans are)
*3% Down Payment must be all “seasoned funds” in borrower’s name (FHA allows gifts)
*Debt Ratios cannot be higher than 45% (FHA allows DTI over 50%)
*Credit Scores must be high (many lenders require a 720 or better)

**Rates for a Conventional 97% LTV purchase are about 1/4 per cent higher than rates for a Conventional 80% LTV purchase.

Here is MGIC’s link to compare FHA to Conventional: http://www.mgic.com/education/mi_better_option.html


*The above rate quote has the following assumptions: $400,000 Loan Amount; 20% down payment; credit score above 740; property is SFR; borrower has sufficient income to qualify; APR is approximately 0.20% higher than quoted rate for a $400,000 loan. Estimated closing costs affecting the APR include $4,595 for Origination and Processing Fees, $850 for other Lender Fees; $1,400 for Escrow Fees, and $1,000 for Prepaid Interest.

Call Jay Voorhees or Heejin Kim at (925) 855-4491

Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646

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