With a 5% down payment, is FHA still the best way?

With a 5% down payment, is FHA still the best way? Maybe. As always, your choice on a mortgage depends on your unique personal situation. I detest rules of thumb and broad generalities when it comes to what type of mortgage is best for a borrower. One size does not fit all. A mortgage should be custom tailored for a borrower like a fine suit.

A conventional mortgage could be a better deal for a borrower than a FHA mortgage if the borrower is making a 5% down payment. If a borrower has or only wants to make the lowest possible down payment, currently FHA is a better choice as it allows a 3.5% down payment. However, this may be changing. Many industry analysts predict that FHA will be raising the down payment to 5% in the near future. This is the result of the Obama administration “white paper” on housing reform that was released in February 2011, that called for higher down payments across the board. Even though VA loans, which require no down payment, have the lowest default rates now, policy makers want to see borrowers have “more skin in the game”.

The key is determining if the borrower would qualify for the conventional mortgage with private mortgage insurance. Conventional loans, requiring mortgage insurance, have far more stringent underwriting standards than FHA mortgages. Remember that a high ratio conventional mortgage is approved contingent upon the borrower obtaining private mortgage insurance. Many clients who would easily qualify for FHA will not fit into the private insurer’s more stringent underwriting model. These requirements include higher credit scores, lower debt-to-income limits, and higher cash reserves.

Your mortgage consultant should analyze your situation to determine which choices are available for you. If you are one of the fortunate few who may go in either direction, a conventional mortgage with private mortgage insurance may be a cheaper alternative. As always, examine what your options are and then do the numbers.

Chip Allen

Crestline Mortgage Bankers

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