Does That 3.5% Down Payment FHA Loan Have Hidden Costs?

Posted by on Wednesday, February 19th, 2020 at 3:55pm

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Excited about that FHA loan because it means you can buy a home with 3.5% down? That minimal down payment is certainly an incentive. But is it your best option? It might not be, because of a little thing called mortgage insurance, which can end up being a BIG thing since it makes your monthly payments more expensive.  

First, a little primer on mortgage insurance. “Mortgage insurance protects lenders from losing money if you default on the loan,” said NerdWallet. “Most lenders require private mortgage insurance (PMI) for conventional loans when the home buyer makes a down payment of less than 20%. All FHA loans have mortgage insurance, regardless of down payment amount.”

Mortgage insurance can cost homebuyers hundreds of dollars per month. “The average annual PMI premium typically ranges from .55 percent to 2.25 percent of the original loan amount each year, according to data from Ginnie Mae and the Urban Institute,” said Bankrate. “With these rates, it means that for a $200,000 mortgage, your PMI can cost between $1,100 and $4,500 each year, or around $91.66 to $375 per month.”

In addition, PMI can be cancelled once the home appreciates to a certain level. But FHA mortgage insurance “usually remains for the life of the loan.”

Getting rid of PMI

So, here you’ve been paying down your mortgage every month, and you also happen to live in an area where homes are appreciating nicely. Sure would be nice if you could get rid of that PMI. But, short of refinancing to another loan, that’s not going to happen. 

Alternative loans

There are a number of different ways to borrow money without mortgage insurance. The first and most obvious answer is to make a 20% down payment on whatever loan you get. Many loans allow you to use gift or grant funds for your down payment, which could be a solution to getting that 20% together if need be.

Short of a generous benefactor, look into these other loans, which allow you to make a small down payment without paying monthly mortgage insurance.

Bank of America’s Affordable Loan Solution® mortgage

This home loan requires just a 3% down payment with no mortgage insurance. Other features include:

• Income and loan amount limits, which vary depending on the location of the home
• Up to 97% loan-to-value
• Loan amounts capped at $510,400 with 3% down payment; You can also make a 5% down payment for a loan amount up to $765,600 with 5% in high-cost areas
• Homebuyer education may be required

Flagstar Bank’s Professional Loan

“These loans are for individuals who are very likely to have high earning potential, but have just started in their careers,” said The Mortgage Reports. “Think doctors, dentists, and lawyers with their own practices. The loan requires no PMI, and very low down payments. As a bonus, student loans could be excluded from debt ratios.” 

In addition to low down payments and no mortgage insurance, details include:

• Loan amounts up to $1.5 million
• Fixed and adjustable rate options

Neighborhood Assistance Corporation of America (NACA) Best in America Mortgage

The NACA loan is for low-to-moderate income individuals or buyers in underserved communities. In addition to no mortgage interest, this loan offers:

• No down payment
• No closing costs
• Below-market rates
• Flexible credit score requirement
• Homeownership program required

SoFi 10% down loan

Don’t have 20% for a down payment but think you might be able to cobble together 10%? This loan might be the answer. SoFi’s 10% down loan offers:

• Loan amounts up to $3 million
• PMI required on conforming home loans with a loan-to-value (LTV) greater than 80%, but not on any jumbo home loans
• Great credit required

Citi’s HomeRun Mortgage

This mortgage requires just 3% down and no mortgage insurance, with flexible credit guidelines. In addition, loans are available up to $510,400, and $765,600 in high-cost areas.

Other features of these loans include:

• Fixed rates
• Interest rates comparable to conventional loan rates
• Homeownership education and counseling required

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