New Rules for FHA and Conventional Loans Could Save You Money - Quicken Loans Zing BlogThe Obama administration recently announced a reduction in mortgage insurance premiums for FHA loans of 50 basis points, or half a percent. The administration expects this to save more than 2 million homeowners an average of $900 each year.

A separate program expands the 3% down payment option for conventional loans. This was initially offered to first-time home buyers, but it makes loans more affordable for people with lower to moderate incomes as well.

Here’s some more information on how you can take advantage of these opportunities and save money.

Lower Mortgage Insurance Premiums

Mortgage insurance premiums (MIP) are required for all FHA loans. They protect the lender in case a client should default. However, they also benefit the homeowner by enabling them access to a mortgage with a lower down payment, which can be as little as 3.5%.

Don’t confuse this with private mortgage insurance (PMI), which is applicable only to conventional loans. Conventional loans require a 5% down payment. PMI can be removed once loan-to-value ratio (LTV) reaches 80%. Unlike PMI, MIP lasts for the life of the loan.

What does this mean in practical terms? I’m glad you asked.

Here’s an example: On an FHA loan, if you make the minimum down payment of 3.5% (96.5% LTV), your MIP would be 1.35% of your mortgage amount under the previous policy. So if you have a $100,000 mortgage, you’d pay $1,350 annually. With the newly announced 50-basis-point reduction, that rate has dropped to .85%. So with that same loan amount, you’re now paying $850 for mortgage insurance, thus saving $500 per year.

David Altesleben, an FHA product manager at Quicken Loans, discussed the benefits of these changes for clients beyond the insurance savings.

“Reduced MIP results in an increase in a borrower’s purchasing power,” he said. “The less money a client needs to pay for MIP equals the more they can qualify for from a principal and interest standpoint.”

From a refinance perspective, clients with debt-to-income (DTI) ratios on the higher side may now be able to qualify because the fees associated with MIP have gone down.

There’s just one catch: The rate reduction in MIP only applies to loans with terms of more than 15 years.

Despite the insurance requirements, there are some definite advantages to FHA loans. Not only do they have lower down payment requirements, but clients with credit scores as low as 580 can be eligible for this loan option (although their DTI will likely have to be in really good shape to qualify).

3% Down on Conventional Loans

Last month, we talked about a 3% down payment program for first-time home buyers. Now, the program has expanded beyond first-time homebuyers to also include borrowers with moderate and lower incomes. This 30-year-fixed loan is a more affordable option than a traditional conventional loan which requires a 5% down payment.

Home buyers must fall within certain income limits to be eligible, and this option requires a higher credit score than FHA, but this could be a good deal for someone looking for an affordable mortgage. This option also allows homeowners to have their PMI removed once they have 20% equity in your home.

There’s also a nifty little trick to save on PMI. It stems from the fact that the loan to value ratio (LTV), a comparison of your loan amount with how much equity you’ve built up in your home, is calculated differently on a refinance than it is on a purchase.

Let’s imagine you have the following scenario:

(a). Loan amount: $200,000

(b.) Purchase Price: $220,000

(c.) Home value: $230,000

On a purchase, your LTV is your loan amount divided by the lower of the purchase price or the home value. In the example above, since the home was purchased for less than its value, A/B = 0.91 or 91%.

In a refinance situation, the LTV is always calculated by dividing the loan amount into the home value. In other words, A/C = 0.869 or roughly 87%. Since PMI can be taken off conventional loans once LTV is down to 80%, this is a better deal for the client. Refinancing means they can pay off PMI sooner even with the same rate and loan amount.

You can take advantage of this option for both purchase and rate/term refinances. Cash-out refinances are ineligible.

Do either of these options appeal to you? Let us know in the comments section.

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This Post Has 71 Comments

  1. It’s a little frustrating to think that I may have to pay $100 a month towards an insurance that’s for the bank and not for myself. I’m looking for a home in the $150k range and my credit score is above 770. Problem is; I don’t have the down payment. Instead of the 20% down; if I found a house that I could buy closer to below market value than I’ve got a chance? Why would someone sell at 80% value? If I bought a fixer-upper; I’d have to put more cash into the home as well… Are there any programs out there that reward people with better credit???

    1. Hi Adam:

      I can tell you that mortgage insurance rates improve with higher credit scores. This is also true if you have a higher down payment. If you take a slightly higher rate on the mortgage, you can get rid of the monthly mortgage insurance payment by opting into lender-paid mortgage insurance like PMI Advantage. If that sounds like something you’d be interested in, we can help you.

      If you get started online, you can use Rocket Mortgage for a preapproval. One of our Home Loan Experts would be happy to take your call at (888) 980-6716. Hope this helps!

      Thanks,
      Kevin Graham

  2. Hi, my credit score is currently at 624 and I have 5% to buy a house. Do I qualify for a conventional loan? And what documents do we need for a loan?
    Thanks!

    1. Hi Joe:

      Based on your current credit score, you would qualify for a conventional loan. However, you’re right on the borderline as the minimum is 620. I’m going to recommend taking a look at our friends at QLCredit. You can pull your credit report for free without affecting your score and get personalized tips on how to improve.

      In terms of documents, every loan product is different in that regard, but this blog post should give you some of the basics. I’m also going to recommend you talk to one of our Home Loan Experts by filling out this form or calling (888) 980-6716.

      Thanks,
      Kevin Graham

  3. I’m interested in building a home, and read about FHA’s new construct to mortgage loan. Can you give me the pro’s and con’s?

    1. Hi Mellissa:

      Unfortunately, we don’t do building loans. So we aren’t the best people to ask. I guess one con is that not everyone does them. You should be able to Google and find lenders that can help you with this.

      Thanks,
      Kevin Graham

  4. When you buy a house when is the best time to refinance? 1 year later or longer. Is it best to wait till you hit the 20% to take off the pmi on your loan or that should not matter

    1. Hi Elizabeth:

      There’s not really a specific time frame other than that if you were going to take cash out of your equity you have to wait six months or a year depending on the type of loan you’re applying for at that point. Beyond that, it really depends on what your goals are. You can stop paying mortgage insurance once you reach 20% equity by refinancing into a conventional loan or giving your loan servicer a call and getting it removed if you’re in a conventional loan. But, if you can save money or benefit from taking cash out, there’s not really a specific time.

      Thanks,
      Kevin Graham

    1. Both conventional and FHA loans are conforming. If you choose, they can also both be fixed loans, meaning the rate stays fixed for the life of the loan. The key difference between FHA and conventional loans are the credit score requirements. You can qualify for an FHA loan with as little as a 580 average credit score. Conventional loans require a 620. You can get a conventional loan with as little as 1% or 3% down. The minimum down payment for FHA’s 3.5%. FHA loans also require you to pay monthly mortgage insurance, potentially for the life of the loan depending on the size of your down payment. Conventional loans have mortgage insurance to if you down payment is less than 20%, but it can come off once you reach 20% equity. You’re also not locked into an FHA loan forever. You can refinance into a conventional loan when your credit improves to eventually get rid of the mortgage insurance. I really recommend talking to one of our Home Loan Experts by filling out this form or calling (888) 728-4702.

  5. I have had some problems with my lender: Bank of America. Why is it so difficult to get out of FHA loan and get a conventional loan with cash back? I am so disappointed to know that I don’t have the opportunity to request the cash out that I need to improve my house.Every lender states that I go over the 3% rule. Need a solution that would work .

  6. I am a person with a permanent disability who is currently receiving SSDI and, also working part-time. My credit score is currently around 680. I was reading about FHA loans for first time homebuyers and was wondering is this going to be an appropriate option for someone in my position?

    1. Hi Dominique:

      Based on your credit score, you could have several different options available to you. I’m going to recommend you speak with one of our Home Loan Experts to see if we have an option that fits your situation. You can get in touch with us by filling out this form or calling (888) 728-4702. Hope this helps!

      Thanks,
      Kevin Graham

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