Is FHA the lowest down payment option?April 09, 2019

Qualifying for 3% down on a Conventional Loan…

Many people still assume that FHA is the lowest down payment option when it comes to buying a home.  However in 2014, both Fannie Mae and Freddie Mac released conventional loan programs allowing for a 97% loan-to-value…meaning 3% down on primary residence purchases.  FHA requires a minimum of 3.5% down, so the conventional options are actually less!

What are the differences between FHA and Conventional Financing?

The very first and most important difference is in regards to mortgage insurance:

  1. FHA requires an upfront mortgage insurance premium of 1.75% which is added to your loan amount. Conventional loans do not have an upfront premium.
  2. FHA mortgage insurance is also included monthly in your mortgage payment… and it is permanent. Conventional mortgage insurance cancels when you have 20% equity in your home. You don’t have to refinance to get rid of conventional mortgage insurance.

FHA financing is more credit friendly.

  1. The mortgage insurance premiums are set for all borrowers regardless of credit scores.
  2. For those with less than perfect credit (you can qualify for FHA financing with scores as low as 580 or if you don’t have any credit scores at all yet) – interest rates are more forgiving on FHA loans.

How do you know if you qualify for Conventional?

To use the 97% loan to value programs from Fannie and Freddie, you must be a first time homebuyer….unless you use the HomeReady or HomePossible program.  First time buyers are defined as those who have not owned a property in the three years preceding this purchase.

What is required from me for a HomeReady Loan?

You can put 3% down, even if you aren’t a first-time buyer.  You’ll just need to meet the following criteria to qualify for the HomeReady program:

  • Income and Property Eligiblity. Use this website to check if the property you are interested in qualifies for the HomeReady program.  It will also tell you if there is an income limit in that area – you will need to earn less than that number in order to use this program.

https://homeready-eligibility.fanniemae.com/homeready/

  • Homebuyer Education is required. You can do this online at the website below, but there is a fee for the course.

https://homeready.frameworkhomeownership.org/

  • Mortgage insurance is a bit less expensive when using the HomeReady program since you only need 25% coverage, instead of 30%!

How about the HomePossible Loan, what are the details for that program?

This is Freddie Mac’s 3% down payment option.  Much of the qualifying criteria is similar to HomeReady and you do not have to be a first-time buyer:

  • Income and Property Eligibility. Use the link below:

http://www.freddiemac.com/homepossible/eligibility.html

  • Homebuyer Education is also required, but free for this program!

http://www.freddiemac.com/creditsmart/tutorial.html

  • Mortgage insurance is also less expensive than what is required for traditional conventional programs.

Of course, the best thing to do is schedule a pre-approval meeting with your mortgage advisor.  You can check your qualification for all loan programs.  You’ll be able to compare the terms of each to determine the best monthly payments and long term strategy for your specific financial needs.