Cost Comparison Part 4: Conventional Financing
Posted Thu, 2010-02-25 10:51 by Emily Caryl
This is the fourth of five posts discussing the costs of obtaining a low down payment mortgage. You can also read the entire post here.
Option 4: Conventional Financing
In addition to government insured programs, many lenders also offer conventional mortgage programs with low down payments.
Qualifying for these programs can be tricky. Lenders are able to provide low down payment options because private mortgage insurance companies are willing to insure the lender against loss. Since these MI companies insure the loans, they also have their own guidelines regarding the types of loans they will insure. Therefore, a borrower often must meet the guidelines of three different entities in order to qualify for any conforming loan that requires mortgage insurance:
- guidelines established by Fannie Mae and Freddie Mac,
- guidelines established by the individual lender, and
- guidelines established by the private mortgage insurance company.
It is not unusual for a lender to have more restrictive requirements than FNMA or FHLMC. For instance, FNMA allows financing of manufactured homes. Many lenders do not.
In addition, each private mortgage insurance company has its own set of guidelines. For example, MGIC will provide mortgage insurance on a condominium with a 5% down payment. RMIC requires a 10% down payment on condos.
To complicate matters even further, each private mortgage insurance company has their own "declining markets" list. If the company has determined that a particular county or metropolitan area is experiencing declining real estate values, their guidelines are more restrictive for properties in those areas. And each MI company has a different list. At AIG, King County, Washington is considered "stable." But MGIC and PMI have both determined that King County is in a declining market. Luckily, every MI company that I checked considers Jefferson and Clallam counties to be in stable markets.
That being said, a borrower with great credit (700 credit score or above) and a low debt-to-income ratio (41% or less) may be able to obtain a FNMA "Flexible 97" conventional loan with only 3% down. Interest rates for low-down-payment conventional loans are slightly higher than government interest rates. There is no up-front mortgage insurance fee.
Conventional loans do require monthly mortgage insurance premiums. That requirement is currently .88-.98% of the loan amount for loans with interest rates fixed at least five years and down payments of 3%. Monthly mortgage insurance costs are added to the borrower's regular monthly payment.
Closing costs for the FNMA Flexible 97 conventional loan may be paid by the borrower or by the seller of the property (up to 3% of the purchase price). Closing costs may not be financed.
*Crunching The Numbers: All calculations presume a fixed rate mortgage with a 30 year term, purchase transaction, owner occupied, 700 credit score, single family detached residence, located in Jefferson County, Washington. USDA GRH example includes interest rate of 4.75%, APR of 5.088%, and guarantee fee of 2% financed into the loan. VA example includes interest rate of 4.75%, APR of 5.049%, and funding fee of 2.15% financed into the loan (the fee for regular military; first time use). FHA example includes interest rate of 4.75%, APR of 5.330%, up-front MIP of 2.25% financed into the loan and monthly MI of .55%. Conventional example includes interest rate of 5.125%, APR of 5.693%, and monthly MI of .98%. All examples include estimate of $600/year for hazard insurance and $2,400/year for property taxes. Cost comparison includes monthly MI payments for 60 months. Loan balance assumes all payments were made on time and no additional amounts were paid towards principal. Calculations do not include closing costs or pre-paids. All interest rates quoted were available on February 11, 2010.
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