Eliminating Conventional Financing With 3% Down Means Buyers Will Pay More

Fannie Mae has eliminated the 3% down financing option and now requires a minimum of 5% down.  This will push buyers towards FHA loans which will increase their closing costs and monthly payments.  Now, you may be thinking that a buyer willing to walk away from a 5% down purchase would probably do the same at 3.5% down but hold on there a minute.   Conventional private mortgage insurance rates are much lower than FHA mortgage insurance and the private mortgage insurance one pays when using conventional financing actually cancels at some point.   FHA mortgage insurance never cancels forcing the buyer to pay it for the life of the loan or forcing them to refinance into a conventional loan at some point in the future anyway to reduce or eliminate it all together.

Investors too will take note of this as conventional loans with 3% down perform better than FHA loans with 3.5% down.  One reason is that conventional underwriting guidelines are more strict and a buyer using conventional financing has an average credit score above 720 while the average credit score of a buyer utilizing FHA financing is in the mid 600s.   Not to mention finding FHA approved properties can be unbelievably difficult for those in markets where condos represent the entry-level property.

With so many first-time home buyers relying on low down payment loans to acquire their first home it is hard to imagine this move by Fannie Mae will do anything other than eliminate one more of the few options entry-level buyers have now.

By David Hughson

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The GreenHouse Group, Inc. | Real Estate Consulting & Mortgage Planning. "Moving People With Purpose."

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