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Mortgage - Banks Lower Down Payment Requirements

I read a mortgage article in CNN Money about how banks are lowering the down payment requirements for home loans.

I see this as a positive sign for the real estate market because lenders are starting to compete more aggressively. 

Before this shift, most lenders were requiring a 20% down payment which made it very hard for most home buyers. Because of the financial meltdown in 2008, they had to tighten the guidelines. 

Previous Mortgage Down Payment Requirements

For the first time home buyer, they were continuing the use the FHA home loan to buy a home since it only required 3.5% down. Many other would be home buyers had to use the same loan product.

This only caused the resources of FHA to deplete faster and they increased the MIP (mortgage insurance premium) which cost borrowers more money up front and on a monthly basis. For awhile I was really getting concerned for the first time home buyer and the housing market in general.

first time home buyer mortgage

With many banks lowering their  down payments to 5%, this will make it easier for people wanting to buy a home to do so using the conventional loan. The conventional loan has a lower PMI (private mortgage insurance) of .78% for a loan value of 90.01% to 95%. FHA has the 1.35% for loan values of greater than 90%. Both of these examples are for 30 year fixed rate loans.

UPDATE: Beginning January 26, 2015, the annual FHA mortgage insurance premium, which is paid monthly has been reduced from 1.35% to .85% saving you money!

What does this mean to a first time home buyer and their monthly payment?

If you had a $100,000 loan balance, the conventional loan would have a PMI payment of $65 whereas the FHA loan would be $112.50. Almost twice as much. Keep in mind this does not include the principal, interest, taxes or insurance. I'm only quoting the PMI or MIP in the case of FHA loans.

So I think you can see that the FHA home loan becomes less attractive for just a little more in down payment money. 

Is FHA Shooting Themselves in the Foot?

While it seems that FHA is actually trying to discourage borrowers, the conventional lenders are starting to compete for the first time home buyer once again. Now mind you, there are many other things that figure into this, I wanted to get this little message out to my readers right away so do your home work. Please read other pages on my site here.

I've been a fan of the FHA loan product because it was so favorable, but it looks like things are starting to change. FHA once had no credit requirements, now they require a 580 score or better.  If your score is 500-579 you have to put down 10% rather than the 3.5% down payment.

With the conventional loan, you need a middle score of at least 680.

My Conclusions

If you have a decent credit score, work on that to get it to the 680. Then start to look at the conventional loan products. You may even find some that allow partial gifting for the down payment like about 2%.

The monthly savings of the PMI could make this a worthwhile endeavor. $50 a month could make a big difference for many home buyers.

So if you're thinking about applying for a home loan online, you may want to check out the conventional loan first. If you cannot fit into this loan, then look at the FHA home loan. So if you're home loan keep these thoughts in mind.

I never thought I would say this, but who knows, things could change back where FHA mortgages may be the better way to go. What makes me say this is the fact that many folks who bought a home using FHA are now trying to refinance into conventional loans.

I don't think refinancing is wise at all if you have to pay closing costs, so there's another opinion.

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