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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. I’m in the processes of buying my second home, I qualified for a FHA at 3.5% and a conventional loan at 5%. I Just want to know which a better option for me would be.

    1. Hi José:

      That depends on what you’re looking to accomplish. FHA loans offer a lower down payment and if you have a high credit score, you can qualify for a higher purchase price then you might be able to on a conventional loan due to relaxed debt-to-income ratio (DTI) requirements. On the other hand, if you make the minimum down payment of 3.5%, you’ll pay mortgage insurance for the life of the loan. If you make a down payment of 10% or more, you pay mortgage insurance for 11 years.

      Turning to conventional loans, the mortgage insurance on those can come off at your request once you reach 20% equity, pending an appraisal to make sure your house hasn’t lost value since you purchased it. You also have to be current on your loan. You also have the option of avoiding a monthly mortgage insurance payment altogether by taking a slightly higher rate and opting for lender-paid mortgage insurance (LPMI). These are just a couple of the factors, but I’m also going to give you this blog post which goes into greater detail.

      One of our Home Loan Experts could also help you decide which is right for you if you give us a call at (888) 980-6716. Have a great day!

    1. Hi Missy:

      Assuming you haven’t refinanced your original FHA loan, MIP does eventually come off because your case number would have been assigned prior to June 3, 2013. In terms of when it comes off, there are a couple of different scenarios depending on your loan term.

      If you have any term other than 15 years, MIP automatically gets removed once you reach 22% equity as long as your current on the loan and haven’t been late in the last year, provided you’ve paid MIP for at least five years. On a 15-year term, as long as the loan is current and you’ve reached 22% equity, MIP is removed regardless of how long you’ve paid the premiums. Hope this helps!

  2. I have a FHA loan that I required after 2013. The bank told me that I haveto pay PMI until the life of the loan. If I reached the 20 percent in my loan. Why I still have to pay PMI on a FHA loan? what options can I do ? If I don have want to refinance . What can I DO ?? The bank can reduce the PMI?

    1. Hi Felix:

      You have to continue paying mortgage insurance premiums for the life of the loan if you got it after June 3, 2013 if you didn’t make a down payment of more than 10% at the time your loan closed. The only thing you can do is refinance. The bank doesn’t have the option to reduce the mortgage insurance premiums because on FHA loans, those are set by the government and it’s government policy. If you would like, you can look in your options with Rocket Mortgage or talk to one of our Home Loan Experts at (888) 980-6716.

  3. My husband and I have been looking into mortgage options. We currently have been in our house since 2008 at the time making only 60,000 combined salaries we did an FHA loan. We are looking in to moving in about a year and will be selling our current house. We currently make about 150,000 combined. Will we need 20% down for a conventional mortgage or can you put down less with a conventional mortgage (we would just have to pay PMI)? Or is it possible we could qualify for FHA again?

    1. Hi Jill:

      You can qualify for a conventional loan by putting as little as 1% down. He would just have to pay PMI until you get 20% equity in the home. You could qualify for FHA again, assuming your credit score is the same or higher. However, you would be better off going and conventional because in most cases mortgage insurance stays on FHA loans for life. If you would like to look into your options, you can get a preapproval online through Rocket Mortgage. If you would prefer to get started over the phone, give us a call tomorrow at (888) 980-6716 and one of our Home Loan Experts would be happy to work with you.

      Kevin Graham

  4. My husband and I would like to purchase a new home. We currently live in my house, which I will keep after we move and put up for sale after some remodeling is completed. I am upside down on my home and owe about $20,000 more than the home is worth (house is in my name only). Together we have an income close to $200,000. His credit score is in the high 600s and mine is close to 800. We are currently trying to pay off most of our revolving credit before buying a new house, but that has left us saving very little money at the end of each month. My husband will be a first-time homebuyer, but I think he makes too much money to qualify for any downpayment assistance. He wants to apply for the home loan in his name but I think it would be better to do a joint loan. What are the pros/cons of doing that? I think we will only have 5% to put down on a home. Is a conventional loan the only type we would qualify for (I don’t want to go FHA)?

    1. Hi Lisa:

      The pros of a joint loan would be that you could qualify for more because you would be using both of your incomes to qualify. That being said, if you want to qualify for down payment assistance, you might use his income alone because of limits. However, as you said, it depend on how much income he makes. If you are looking at down payment assistance, you may have more options through FHA.

      The only other loans we do besides conventional and FHA are VA loans right now. In order to qualify for that, one of you would have to be a veteran or serving active duty.

      If you want, I think the best thing for you to do might be to speak with one of our Home Loan Experts by filling out this form or calling (888) 980-6716. They would be able to go over all of your potential options.

      Kevin Graham

      1. Down payment assistant programs take into account HOUSEHOLD INCOME not only the borrower’s income. So, that wouldn’t help.

        1. Hi Carlos:

          In many cases, this may be true, but without looking into the specifics of each program, that may be a bit of a broad statement. Thanks for reading!

  5. We are trying to do a fha cash out refinance with our home that has over 200,000 dollars in Equity but, we are still told we need to pay pmi for 11 years even tho we have a lot of equity?? Is this normal?

    1. Hi Terra:

      Unfortunately, if you go with an FHA loan, the FHA requires that you pay the FHA requires that you pay for mortgage insurance (MIP) for 11 years regardless of how much equity you have in the home. That being said, if you have at least 20% equity in your home, you could refinance into a conventional loan and avoid paying for mortgage insurance. If you would like, you can speak with one of our Home Loan Experts by filling out this form or calling (888) 980-6716.

      Kevin Graham

  6. I have a private mortgage loan, with a high rate, which has caused financial difficulties. I need advice , are there programs to help lower my rate.

    1. Hi Jacqueline:

      Every situation is different, but we can certainly help you look into your options. The easiest way to get in contact with one of our Home Loan Experts is to give us a call at (888) 980-6716. Have a great day!

      Kevin Graham

  7. 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!

      Kevin Graham

  8. 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?

    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.

      Kevin Graham

  9. 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.

      Kevin Graham

      1. I just want to give you kudos for a great answer. I love referring people to other places (even google) when you are not the people to talk to about a subject.

  10. 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.

      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.

  11. 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 .

  12. 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!

      Kevin Graham

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