Many homebuyers confide in real estate agents and loan officers to find them the best price, real estate agent Bill Gassett says some real estate agents may not understand the value of knowing about all of the low down payment options available to their clients.
In fact, Gassett said in a recent post for mortgage industry blog, MGIC Connects, that out of the most recent NAR Profile of Buyers and Sellers states, 40% of repeat buyers, and 66% of first-time home buyers, are putting less than 10% down. Understanding all of the low down payment mortgage options available to borrowers and leveraging this information to help them save money has the potential to positively impact your business growth.
1. FHA is mortgage insurance
Many people get confused and think that the Federal Housing Authority provides a different type of mortgage insurance, but really the FHA and Private Mortgage Insurance offer the same service except that FHA is more government based.
2. PMI allows a borrower to put less money down
The difference between getting conventional loans with private mortgage insurance and getting a loan with the FHA is that it allows for as little as 3% down for a down payment, while with the FHA requires a 3.5% down payment. Conventional loans also allow for the use of 100% gift funds.
3. FHA can lead to more borrower debt
Even though PMI borrowers with conventional loans may put in less money down, they still end up with less debt than borrowers who take out FHA loans. Since the FHA charges an upfront premium along with the monthly mortgage insurance, the upfront premium is most likely financed into the loan which causes the total amount borrowed to increase. This is good news for borrowers who have higher credit scores as they gain by going conventional.
4. Credit scores make a difference
No surprise that credit scores make or break you, especially when purchasing a home. While most PMI premiums are based on credit, FHA loans are not. PMI borrowers with high credit scores receive a low premium and save more money by going conventional, FHA borrowers with lower credit scores often find FHA a lower-cost option.
5. FHA mortgage insurance can’t be terminated
Another huge difference between the FHA and the PMI is that low-down payment borrowers relying on government mortgage insurance with the FHA is has to at least put down 10% they won't be able to cancel their insurance. PMI on the other hand is a short term solution. Gassett states It’s automatically dropped when the loan reaches 78% loan-to-value. Borrower can request the private mortgage insurance to be cancelled once the loan reaches 80% of the original value, based on either the actual payments made, or the initial amortization schedule or current amortization schedule, irrespective of the actual loan balance.
While many first time buyers have no idea what to do when purchasing a home, loan officers and real estate agents need each other to thrive in their respective businesses.