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 89 Comments

  1. Help!
    My credit score is around 580… but only because I am being scammed- if you know this business the explanation is: 2012: BOA sold my loan to Everbank in the middle of a loan mod. At the time I was at 6% FHA 30 year fixed and wanted a lower rate. At the time I mortgage illiterate (now I am self- studied mortgage brilliant) and didn’t realize the difference between modification and refinance (which I did in 2008) with Surepoint Lending. (Not Everbank, although that’s when they claim they took over my loan…. I don’t think they know……). Because, all was so confusing, I hired an rep from Michigan Modification Llc (highly recommended?). Well, was serviced by Everhome mortgage until May 2014, when …. Green tree (Now ditech -name changed due to horrible reputation- same account). …. forced placed insurance double MIP’s taken out of one month etc. etc. loan was transferred from Everhome to green tree/ditech 5/2014 with -440$ escrow. I have books of records and everything from 1/2014 on (saw green tree complaints and ran scared)
    It doesn’t matter. I was paid up thru 3/2016 when all hell broke loose….. they tried taking $ they weren’t owed out of my bank account and then started returning payments. Even completed payments. Because they were considering me in default….. because they made an “error” and returned my payments many times now…. they wanted “late fees”… returned my checks and undid monthly from 2015 (against by mistake ….) I have tried to pay several times (they even kept a check for over $8000 for over 45 days before returning. I have overwhelming documentation…. they don’t care… so I pay my savings account and wonder what to do. At first they had me defaulted all the way back to 11/1/2015. Tried to work with IN Attorney General (awful experience)… managed to get paid up till 3/1/2016….. then same old song and dance. Have gone to multiple lawyers,…. they will represent me when everbank files foreclosure – I’ve even checked with county courthouse, nothing ever filed….. except….. in 2013… they actually forclosed my house and then turned around and sent a loan modification approval same day …. I NEVER knew until greentree.
    Long story short – if I don’t have a nervous breakdown from this and can get them into court I will NEED a new mortgage company!

    1. Hi Katie:

      I honestly don’t know if there’s anything we can do for you right at the moment, but there are people more knowledgeable than me. If you call 888-728-4702, maybe one of our Home Loan Experts can offer some advice. I do wish you good luck.

      Thanks,
      Kevin Graham

  2. Hi,
    I’m interested in purchasing a condo. I only have 3%-5% to put down. My credit score is only about 570. Is it possible to get approved for a conventional loan with only a 3 to 5% down payment.?

      1. Hi Gloria:

        Unfortunately, the minimum credit score for an FHA loan is 580 and conventional loans require a 620. We do have a service in QLCredit where you can pull your report without affecting your score and get recommendations on how to get it up. However, I’m also going to recommend you talk to someone depending on the type of condo you get, it may require a higher down payment.

        You can get in touch with one of our home loan experts by filling out this form or calling 888-728-4702.

        thanks,
        Kevin Graham

  3. I have a daughter who is 19 and has only a few moths on the job and was a college student prior to going to work fulltime. Her credit score is 680. I am willing to go on the loan with her but fear my debt to income ratio is too high. I do have a mortgage in my name that my mother pays because she lives in the property fulltime. Any suggestions? Can we do a Conventional Loan?

    1. Hi Angela:

      We can definitely help you look into your options to going on a loan with your daughter. Every situation is different so it’s probably best to talk to one of our Home Loan Experts. You can get in touch with them by filling out this form or calling (888) 728-4702.

      Thanks,
      Kevin Graham

  4. Hello, my wife and I would like to purchase a second/vacation home. She bought our house before we got married therefore my name is not in the loan/title. Could we purchase a second/vacation home and not have to put down 20%?

    1. Hi Clark:

      You can purchase a second home with a fixed-rate mortgage for as little as 10% down. If you would like to get in touch with one of our Home Loan Experts to go over this, you can do so by filling out this form or calling 888-728-4702. I hope this helps!

      Thanks,
      Kevin Graham

  5. I’m a first time home buyer and I need to find a 4 bedroom home I’m trying to buy a home with my motherinlawshe retired and have excellent credit and mines is good I have my home buyers certificate and 20k what do we do first

    1. Good afternoon, Percy. The next step is to get approved for a mortgage. You can do that at Rocket Mortgage, which uses technology to speed up the home loan process. Best of luck to you and your mother-in-law, Percy!

  6. We are trying to mortgage a new const condo with more then 20% down. We had a chapter 13 filed in 2008 and discharged in 2010. The property that was filed on did not go on forecloser until 2016 on sheriff sale. Our credit scores are in the 600’s, and was wanting to know of

    other type of mortgage we can get? Was turned down for a FHA.First was told we had a preaaproval until they seen the sheriff sale wasnot until 2016.

    1. Hi JeVon:

      The soonest we can help you with any mortgage option is 12 months after the foreclosure and the foreclosure close is when the sheriff sale is processed. Hope this helps give you a timeline.

      Thanks,
      Kevin Graham

  7. My husband and I live in Oregon currently and have an opportunity to purchase property from our mother in law in NC. It was left to her by her mother and the state has a lien on the property for $30,000. How can we go about purchasing this home? What you’re of loan? Do conventional loans allow the purchase of a home that is not the primary residence and also a home that needs major work, roof, etc?

    1. Hi Elizabeth:

      You can purchase property that’s not your primary residence with a conventional loan. It’s either a second home or investment property depending on how you intend to use it. You can get a mortgage and then fix it up afterward. The thing you need to be aware of is that the appraiser has to see that the property passes certain conditions that make it livable. I’m going to suggest you talk to one of our licensed mortgage bankers that can look into your situation and help walk you through this. If you fill out this form, I can have someone that’s licensed in your state reach out.

      Thanks,
      Kevin Graham

  8. Hi , I want to purchase a home in Maryland but I live in Florida . I have been talking to some loan officers and they tell me I would have to do a conventional loan since it will not be my primary residence. The home that I was looking to purchase was 125,000. Can someone tell how much money I would need to close on a home of this price.

    1. Hi Zachary:

      It’s difficult to tell you what the closing costs might be because it depends on the lender and the way the loan is structured. There are also some low down payment options even lower than FHA for conventional loans if you qualify. If you go through our Rocket Mortgage, you can get a preapproval in minutes and get an idea of what the cost would be. That might be the best thing for you to check out.

      Thanks,
      Kevin Graham

  9. Hi,
    My husband and I became first time home owners with FHA last year. April 2015. We put 3.5% down.
    Out interest rate is 3.875
    Since then the value of our home went up anywhere from 30k to 50k… possibly more. When we first bought the home last year, my husbands credit score was around 710. However, we did open 4 credit cards and financed a minivan since then. I’m not 100% sure what his credit score is now, but I think it’s around 650. Since my home is valued at more than we owe, could we refinance with our fha loan and get the 50 point credit to save us money every year? Is it possible to refinance and go with a conventional loan option to make our payment smaller? My husband makes about 70,000 a year and we are a family of 5. Thanks

    1. Hi Ramona:

      There’s a lot that goes into this. I’m going to have someone reach out to go over all of your options.

      Thanks,
      Kevin Graham

  10. my husband and I are looking into purchasing a vacation/rental home out of state (NC). I have never owned a home and he hasnt in over 8 years. He is former military. Are there any special loans that do NOT require 20% down?

    1. Hi Angela:

      VA loans don’t allow for the purchase of investment properties so there’s no particular help there. I can tell you you can purchase a one-unit rental property with as little as 15% down. I’m going to have someone reach out to help you go over your options.

      Thanks,
      Kevin Graham

  11. Hi my name if Felix my wife and I are looking to buy our first home our credit not great in the 600’s. Not sure about anything on getting started but want to be in a BETTER school district before the school year. We have 10 to 15,000 for down payment. was told FHA was the best way to go but I know the process is like 90s so I want to be as prepared as possible. As you can read im lost.

    1. Hi Felix:

      We can definitely help you look into all your options. We pride ourselves on having our process be as smooth as possible. I’m going to have someone reach out.

      Thanks,
      Kevin Graham

  12. Hello Kevin,

    I am a high school teacher making about 52K a year with 10k as a possible down payment. I have been approved for 325k for an FHA loan but I am wondering how I can qualify for a conventional loan. I am located in LA and have been looking for a condo, but most of them are not FHA approved. Any help would be great. Thanks!

    Alberto

    1. Hi Alberto:

      I’m going to have someone reach out so we can look into this for you. I can tell you that one of the main qualifiers for a conventional loan is your credit score and the minimum is 620. Someone will be in contact.

      Thanks,
      Kevin Graham

  13. My husband and I would like to purchase a second home as a rental/vacation condo in FL but are wondering if we can do it with a conventional 3% down loan. His score is 720 and mine the mid 600’s. Not sure how the PMI works on a 200,000 loan. Is there a set amount for the mortgage insurance? per hundred thousand of loan? Thanks

    1. Hi Jennifer:

      You can’t get 3% down on a rental property, but I’m going to have someone reach out to you to go over your options. PMI also depends on a lot of factors. They’ll be able to take you through all this.

      Thanks,
      Kevin Graham

  14. I am in the process of being a first time buyer. Both my husband and I worked hard at bring our credit scores up to more than 580. One home we placed an offer it was accepted but the home was appraised for less then what we offered. Now we found another home which cost way more than the one we got our offer accepted. The problem are the loans. We were approved for a FHA. We were told that the FHA only goes up to 350,500. Both homes are in San Bernardino county. We were told that we will need a Conventional Loan but the credit scores must be revisited. Please tell me how high does your credit score need to be in order to get a Conventional Loan? Will we have to come out of pocket as well.

    1. Hi Margaret:

      According to the website for the Department of Housing and Urban Development, the loan limit for a single-family home in San Bernardino County is $356,500 for an FHA loan. For a conventional loan, your credit score needs to be 620. We can have someone help you look into all your options. If you can qualify with your credit, there are a variety of low down payment options available.

      Thanks,
      Kevin Graham

  15. I am looking at purchasing a home and putting almost 50% down.
    My credit is in the mid 600’s and rising.
    Is there flexibility with the debt ratio when putting 50% down?
    The home price will be $600-625,000 and I will be putting $300,000 down.
    I am recently retired.

    Thank you

    1. Hi Debbie:

      Every situation is different. I’m going to have someone reach out to you and help you look into your options.

      Thanks,
      Kevin Graham

    1. Hi Ruben:

      The amount necessary for the down payment depends on the type of loan you’re getting and the number of units involved. I’m going to have someone reach out to get more information on your situation.

      Thanks,
      Kevin Graham

  16. Hi I owe $130k on 15 yr mortgage. I also have a Heloc of $50k. I would like to get rid of pmi. This property is currently rented off ( not sure if it makes a difference). I have a credit score of 730. Would like to learn what my options are.

    1. Hi Pat:

      We don’t do home equity lines, but we can help you look into your options. Someone will be reaching out.

      Thanks,
      Kevin Graham

  17. I was a few weeks from closing woth a usda loan when i was told i have caivrs claim so my option was conventional loan. Yet my broker said 10 to 20% down. My score is 635 and lender said my credit report was good. So do i qualify for 3% down? My realtor is looking into otjer options like bank loans. But i am looking for options myself also.

    1. Hi Judy:

      I would be happy to have someone reach out and look into your options with you. They’ll be in contact shortly.

      Thanks,
      Kevin Graham

  18. I have little money down and a credit score of 620-660. Can I qualify for a no money down mortgage if I made 80,000 last year and around 38000 of debt which is car and student loans?

    1. Hi Charlie:

      We’d be happy to help you look into your options. Someone will be reaching out. One thing I can tell you is that the only 0% down loan we offer is through the VA.

      Thanks,
      Kevin Graham

  19. I am purchasing my future in laws home and property with an instant 20% equity. I had a preforeclosure/shorts sale in 2011 but has since improve my credit, 690-710, and have a DTI of 15-16%. can I qualify for a conventional loan or should I go forward with FHA? Since i’ll have an instant 20% equity will a PMI or MIP still be required? Thanks for the info.

    1. Hey Abs:

      Given the time frame, you should be able to go with a conventional loan. With a conventional loan and 20% equity, there would be no PMI assuming it was your primary residence. I’m going to have a Home Loan Expert reach out to help you look into your options.

      Thanks,
      Kevin Graham

  20. I’m looking to build in June 2016 just spoke with a financial advisor he said I qualify for a fha loan bin this area the cap is $316,250..what if I wanted to build a house that was $350,000..is the difference out of pocket or should I go conventional??hv someone call me need advice.

    1. Hi Jolene:

      Unfortunately, we don’t do loans on new construction. However, I can have one of our Home Loan Experts reach out to get some more information from you and see if we can answer your question on the loan limits in your area.

      Thanks,
      Kevin Graham

  21. So am I understand this correctly, that one can do a conventional loan with less than 20% down but will be required to pay PMI until you’ve paid down the principle by 20%? Example: my husband and I are looking for a home no more than 350K but we’ll only have about 30K to put down.

    1. Hi Nancy:

      In the example you just gave, you would have to pay PMI until you reach 20% equity, yes. You can avoid it with lender-paid mortgage insurance (LPMI) options like PMI Advantage. I can have a Home Loan Expert reach out to you with more information.

      Thanks,
      Kevin Graham

  22. Reach out to me i am in a fha loan i want to ser if i qualify for the conventional loan.. I thought you guys said you would reach out to customers when better options become available? I had to find out myself about this?

    1. Hi Dom:

      We can absolutely reach out to you and look into your situation to see if a conventional loan is right. We’re sorry about this and someone will be reaching out to you today.

      Thanks,
      Kevin Graham

    1. Hi Michele:

      Homeowners insurance protects your physical house and the possessions inside it. MIP is an insurance policy on the loan itself that you pay for and it protects the investor on the loan in case the borrower defaults. PMI is the same thing, but for conventional loans. Your lender would be able to tell you which one you have. Have a great holiday!

      Thanks,
      Kevin Graham

  23. You have run our application through once and denied us. We have since then paid off our outstanding bills but still have a 1st and 2nd mortgage payment and a payment to a consolidated debt company.
    Do we qualify for a FHA refinance? If so, I would like HOSS to call me back or email me.

    Thank you.

    Kathryn

      1. HI MY NAME IS ERMA AND I AM TRYING TO BUY CONDO MY CREDIT SCORE 640LTO 700 AND ALL CONDS WANT 20% down how can you help me

        1. Hi Erma:

          We can definitely help you look into your options. Someone will be reaching out. Have a good day!

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