FHA financing remains the only mortgage option available to many borrowers able to make only a minimal down payment for a new home. Offsetting this advantage, however, is the high cost of FHA mortgage insurance .
Due to a large number of loan defaults, the FHA was recently forced to raise monthly mortgage insurance premiums and this has added to the cost of a borrower’s monthly payment. In addition, the FHA also charges a one time an upfront mortgage insurance premium of 1% of the loan amount. The combination of the monthly and upfront FHA mortgage insurance premium has resulted in a much higher monthly payment for many borrowers.
For some first time homeowners, there is a lower cost option to FHA financing. For those borrowers able to save 5% for a down payment, (only slightly more than the 3.5% required on an FHA loan) private mortgage insurance (PMI) is available which can save a borrower thousands of dollars over the life of the loan.
In addition, if a borrower has an excellent credit score of 720 or above, private mortgage insurance is available with only a 3% down payment. Typically, on a single family owner occupied dwelling, a borrower needs a credit score of 660 to get loan approval at the 95% loan to value level. Specific underwriting guidelines will apply to each borrower.
Another advantage of private mortgage insurance is that it can be obtained on the purchase of a second home, an option which is not available through the FHA.
The savings to the borrower by making a slightly higher down payment and taking a conventional mortgage with PMI instead of an FHA mortgage can be significant.
One of the major private mortgage insurance companies is PMI Mortgage Insurance Company. PMI has a PMI/FHA Comparison Calculator on their website in which a borrower can input his basic loan information to see if savings are available with conventional financing compared to FHA financing.
According to the PMI website calculator, a borrower could save $7,600 over five years on a $225,00 loan with PMI compared to FHA. (Please click on the chart for a larger image.)
PMI/FHA CALCULATOR - COURTESY PMI
The PMI Mortgage Insurance Company also has an affordable housing product program for low to moderate income borrowers unable to come up with a down payment and closing costs, yet able to demonstrate the capacity and willingness to repay a mortgage loan.
Keep in mind that there are complex underwriting guidelines involved in obtaining a mortgage approval. The savings shown on the PMI website should be reviewed in depth with your lending institution to verify loan qualification and savings. Given the savings that are potentially available to a borrower, both the conventional and FHA financing options should be thoroughly explored.