Until recently, borrowers with down payment money representing less than 5% of a property’s purchase price were limited to FHA loans. We now offer a Fannie Mae program that requires only a 3% down payment, and that 3% can be a gift! Unlike USDA Home Loans, you do NOT have to be within a “Rural” footprint, and there are no income “caps.”

For the right borrowers, conventional financing to 97% offers certain advantages over FHA loans. Conventional financing allows just 3% down payment versus FHA’s 3.5% requirement. The loans tend to be a bit easier to work through the process and loan costs are generally lower than with FHA loans, which include an upfront mortgage insurance premium  (their version of PMI) of 1% of the loan amount, and the monthly mortgage insurance premium of 1.15%.

The appraisal process is also somewhat less stringent for conventional financing, allowing slightly more latitude in property choice… this is especially true if you compare this program to USDA Home Loans, since you can use this program to purchase in Cary or Raleigh City Limits.

The “downside” to this conventional loan, is that those with a “Short” credit history, are not likely to meet the more demanding credit requirements. To qualify, the debt-to-income ratio cannot 41% (meaning 41% of your GROSS before taxable income for the housing payment and all of your other debts) and credit scores must be 740 or higher.

Conventional financing to 97% is also held to the true conforming loan limit of $417,000.  Within a few weeks, Congressional Changes will mean that in Wake County, NC the maximum FHA limit will again be $305,000 (today it’s $271,050).   In addition to the upfront mortgage insurance premium of 1%, and typically higher underwriting and processing costs, FHA mortgage insurance often carries a higher monthly payment. Depending on loan size, mortgage insurance payments can easily run several hundred dollars per month.  On a Conventional Loan of this type, we can offer you a slightly higher interest rate to cover the mortgage insurance (called Lender Paid PMI), or we can do a single premium, cutting the cost and the total monthly payment significantly.

FHA borrowers are also locked into longer mortgage insurance periods than are those with conventional financing. FHA loans carrying a term of 15 years or more require mortgage insurance for the first 5 years of the loan. The mortgage insurance can be removed after 5 years have elapsed and there is 22% equity in the property.  Our experience is that  the borrower must often petition for its removal. By contrast, with conventional financing, mortgage insurance is automatically removed once the loan-to-value ratio reaches 78% of the original purchase price. The borrower can also definitively remove mortgage insurance sooner by providing an appraisal showing that they have at least 20% equity in their property.

When you do a side by side comparison of the monthly payment on a FHA 97.5% loan and a Conventional 97% loan… you’ll see that the Conventional loan is cheaper.  FHA and USDA Home Loans still provide great options for borrowers with limited down payment money and lower credit score applications. For borrowers with stronger earnings and FICO scores, this newly enhanced conventional financing option may be the better option.

If you are considering a purchase in NC, and want to know what you qualify for, or if you are comparing your monthly payments on a no money down mortgage loan, call Steve Thorne 919-649-5058!  We offer the best programs with the LOWEST Rates available!

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