Many buyers with limited down payment funds think FHA financing is their only option. But, for loan amounts under $417,000, Conventional Buyers can put down as little as 3% (0.5% less than FHA requires). Below are some of the benefits and drawbacks of Conventional Financing.
Benefits of 3% Down Conventional Financing (vs. 3.5% Down FHA financing):
(1.) No Up Front MIP required. (FHA now requires 1.75% of the loan amount as up front MIP).
(2.) Lower Monthly MI. (Conventional PMI can be as low as 0.88% while FHA MI is 1.25%)
(3.) No minimum required time for PMI. (FHA requires MI for a minimum of 5 years).
(4.) Sellers look more favorably on “conventional offers”. (This is a misconception, but a reality in the market place).
Drawbacks of 3% Down Conventional Financing (vs. 3.5% Down FHA financing):
(1.) Conventional Rates are higher. (FHA rates are about 0.5% LOWER than high LTV conventional rates; if credit scores are lower, the rate disparity is even greater)
(2.) Underwriting Guidelines are tougher. (FHA allows for all gift funds, much higher debt ratios, and much weaker credit)
(3.) Loans are not assumable. (FHA loans are assumable – a great feature in the future when rates climb)
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