The Conventional Mortgage is Back in 2011!

Tuesday, July 26, 2011

Over the past 3 years government backed mortgage loans (FHA/VA) have become more and more popular due to actual and perceived difficulties in being approved for a conventional loan. Now there are a bunch of good reasons to look at conventional loans again.

Since October of 2010 FHA has raised the cost of monthly mortgage insurance premiums twice and doubled the monthly cost! The rate was .55% annually and was increased to .90% and then again to 1.15%. I’m not here to debate if these increases were merited, just to report the fact that they happened. To show the impact of this let’s look at a $100,000 mortgage. Prior to these changes the monthly cost of FHA monthly mortgage insurance was $45.83 and now that same insurance is $95.83 per month. Ouch! FHA also increased the minimum down payment to 3.5%.

Contrary to popular belief, Conventional loans at up to 95% loan to value (LTV) are once again available and are approvable. We even have new programs available for up to a 95% LTV with no private mortgage insurance (PMI)! These programs can be very advantageous to a home buyer and often result in lower monthly payments and no PMI expense. This is known as Lender Paid Mortgage Insurance (LPMI). Here is an example for a $200,000 Purchase Price and assuming buyer has a 720 credit score:

                                    FHA w/ 3.5% Down        Conv 5% Dn with LPMI
Interest Rate                                  4.500%                                    5.000%
Down Payment                             $7,000                                   $10,000
PI Payment                                $987.68                                 $1,019.96
Monthly PMI                             $184.96                                        $0.00
Total Monthly Pmt                  $1,172.64                                 $1,019.96

 Monthly Payment Savings of $152.68 with Conventional loan!

As you can see, the LPMI Conventional loan saves the home buyer $152.68 per month and the additional down payment is only $3,000. Many home buyers could actually afford a more expensive home and end up with the same house payment using LPMI. In this example using the Conventional loan the purchase price could increase all the way to almost $220,000 before the monthly payment equals the FHA loan! That’s a lot more purchasing power with the same overall monthly payment. This is an option that should not be overlooked. Are you working with a lender that offers, and knows how to use, the most innovative mortgage loan programs?


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