Buy a Home with 3% Down without Monthly Mortgage Insurance?

Mortgage Insurance AlternativeMortgage insurance is required on all FHA insured home loans.  FHA requires two mortgage insurance premiums, upfront mortgage insurance equal to 1.75% of the loan amount and annual mortgage insurance added to your monthly payment.

Currently, the annual mortgage insurance premium is 1.25% if you have less than a 5% down payment available, 1.20% of the loan amount if you have a 5% down payment.

FHA has announce that they will increase the annual premium another .10% in the first quarter of 2013 and there are even talks about about increasing the annual mortgage insurance premium to as high as 2.05%.

Alternative Mortgage Insurance Options

there are two PMI programs that do not require you to pay a monthly mortgage insurance premium in addition to your mortgage payment

Surprisingly enough, many home buyers believe that you have to have a 20% down payment use conventional financing and avoid the costly expense of the two mortgage insurance premiums required when using FHA financing.

Not only does Conventional financing allow you to buy a home with a lower down payment, 3% minimum as opposed to 3.5% minimum if using FHA, conventional financing offers more creative and more flexible mortgage insurance options.

The mortgage insurance required with Conventional financing is call Private Mortgage Insurance, or PMI.

While there is no way to buy a home with less than 20% down and no mortgage insurance, there are two PMI programs that will not require you to pay a monthly mortgage insurance premium in addition to your mortgage payment.

Single Premium Private Mortgage Insurance

A single premium mortgage insurance policy allows you to pay then entire policy one time, up front and does not require monthly payments.

An informed and creative lender will tell you that the single mortgage insurance premium can be paid by the seller of the home using seller concessions, or can be paid for using a closing cost assistance program such as CalHFA CHDAP.

Pro Tip

  • Use seller concessions to pay single premium mortgage insurance
  • Use closing cost assistance programs to pay single premium mortgage insurance

Lender Paid Mortgage Insurance

Lender paid mortgage insurance is exactly what it sounds like, the lender pays the mortgage insurance premium.  There is a catch though, the lender will pass cost of the mortgage insurance along to you through an increase in the interest rate.

An slight increase in the interest rate will leave you with a much lower mortgage payment than if you were to add a monthly premium to your payment.

Pro Tip

  • Converting PMI into lender paid mortgage insurance makes it tax deductible as mortgage interest – talk to your accountant for details!

Is Conventional better than FHA?

There are benefits and challenges with both programs.  As a standard rule of thumb, Conventional home loans require good credit while FHA is more flexible and forgiving with borrowers with lower credit scores.

There may also be an interest rate difference between the two programs.  This may change depending on the current market, and as I write this article FHA interest rates are slightly lower than Conventional.

Ask your lender to compare both options for you so that you’re making an educated and informed decision after taking all options into consideration.

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