I specialize in Kentucky First Time Homebuyers FHA, VA, USDA & Rural Housing, KHC and Fannie Mae mortgage loans. I have helped over 1300 Kentucky families buy their first home or refinance their current mortgage for a lower payment; Kentucky First time buyers we still how available down payment assistance with KHC. Free Mortgage applications/ same day approvals. Web site is not endorsed by the FHA, VA, USDA govt agency. Text/call 502-905-3708 kentuckyloan@gmail.com NMLS 57916 NMLS 1738461
What is the difference between Kentucky FHA Loans and Conventional Mortgage Loans?
You know that two of the most popular mortgage options available are FHA and Conventional, but you no doubt have some clients who need help understanding each loan type’s finer details and benefits.
Here’s a quick, simple three-bullet comparison that you can provide for your clients:
Low down payments:
Both options feature low down payment options (eligible borrowers can put down as little as 3.5% for FHA and 3% for Conventional), but it can be easier to qualify for an FHA loan, as lower credits scores are accepted and there are less restrictive debt-to-income ratio requirements.
Residence type:
You can only use an FHA loan on a primary residence; a Conventional mortgage can be used for primary homes, vacation homes, or investment properties.
Mortgage insurance:
Mortgage insurance is required on all FHA loans, regardless of down payment size. You can avoid paying private mortgage insurance on a Conventional loan if you have a 20% down payment. But if you don’t, PMI drops after you reach 22% of your home’s equity.
If you can’t pay your mortgage, mortgage insurance protects your lender from financial loss. It doesn’t provide any coverage for your home; it only protects your mortgage lender. If you put less than 20% down on a home purchase, the lender considers your mortgage to have a higher risk. Therefore, mortgage insurance protects their investment if you stop making loan payments.
When Are You Required to Have Mortgage Insurance?
Different mortgage types and lenders have varying mortgage insurance requirements. While some may require mortgage insurance as a monthly payment, others may require an upfront fee or a combination of both.
Conventional Loan Mortgage Insurance Requirements
If you have a conventional loan through a private lender and put less than 20% down, a lender can require you to purchase private mortgage insurance (PMI). While some lenders require the borrower to pay for the mortgage insurance, other lenders offer lender-paid mortgage insurance. In other words, instead of directly paying for the mortgage insurance, the lender increases the interest rate to account for the additional risk of the loan.
There are several ways you can pay for your PMI if it’s a requirement:
Pay the entire amount in full
Make monthly payments
Or combine the two options
Most borrowers choose to make monthly payments.
You’ll continue paying for PMI until your mortgage balance reaches 80% or less of the home’s value and you have made timely payments. At this point, you should request the removal of PMI. Some lenders will automatically remove PMI when your loan balance reaches 78% of the original value of the home.
It’s important to point out that it’s your responsibility to keep track of the loan balance and payments. So when you reach a sufficient amount of equity, it’s up to you to request a cancellation of PMI. If you don’t, you could end up paying more premiums than you need to.
Some conventional lenders don’t require PMI, even if you put less than 20% down. So before applying for a mortgage, ask the lender about the PMI requirements.
FHA Mortgage Insurance Requirements
Suppose you choose a Federal Housing Administration (FHA) loan. In that case, you’re required to have mortgage insurance and pay it as an upfront mortgage insurance premium (UPMIP) and an annual mortgage insurance (MIP) regardless of your down payment amount.
Similarly, if you choose a U.S. Department of Agriculture (USDA) loan, you pay mortgage insurance in the form of a guaranteed fee and an annual upfront fee.
With an FHA loan, there are some circumstances where you can’t cancel your mortgage insurance when you reach 20% equity. MIP will remain in your loan indefinitely if you put less than 10% down. On the other hand, MIP can be removed after 11 years if your down payment is over 10%.
How to Get Mortgage Insurance
Your lender will select your mortgage insurance from a private company if you have a conventional loan. The payment is included in the monthly payment to your lender. Other lenders increase your interest rate to account for the mortgage insurance payment.
Unlike conventional loans, FHA loans require an upfront mortgage insurance payment as part of your closing costs. But like conventional loans, the other portion of your mortgage insurance is added to your monthly payment. Both payments are paid to the FHA.
Mortgage Insurance Cost
Depending on factors like your loan type, credit history and down payment, mortgage insurance costs can vary. But you can expect to pay between $30 and $70 per month for every $100,000 you borrowed, according to Freddie Mac.
With a USDA loan, you can expect your annual mortgage insurance rate to be 0.35% with a 1% upfront payment. FHA loan annual mortgage insurance rates currently vary between 0.8% and 1.05%, with a 1.75% upfront fee.
Suppose you buy a $300,000 home with a 3.5% down payment, for example. This means you must borrow $289,500. If you have a 30-year term with a 2.71% interest rate, you’ll pay an extra $114.54 (0.85%) in MIP with a UFMIP of $5,066.25.
How to Avoid Mortgage Insurance
If possible, you can avoid mortgage insurance since it covers your lender, not you. To avoid paying this additional expense, here are a few options.
Put down 20% or more. If you can put more than 20% down on a conventional loan, you probably avoid paying for PMI.
Take out a piggyback loan. With this type of loan, you can put 10% down and get another loan to cover the other 10% of the down payment.
Apply for a VA loan. If you qualify, you could buy a home with a VA loan, which doesn’t come with mortgage insurance requirements.
Compare lenders. Before you decide on a home, compare loan options and offers from various lenders; some may not require mortgage insurance. Review all costs involved to find the most suitable option for your needs.
If you do end up purchasing a home with mortgage insurance, make sure to keep track of the equity built in your home. This way, once your loan is less than 80% of the home’s value, you can either refinance or request a cancellation of your mortgage insurance if your lender allows.
I can answer your questions and usually get you pre-approved the same day.
Call or Text me at 502-905-3708 with your mortgage questions. Email Kentuckyloan@gmail.com
Joel Lobb (NMLS#57916) Senior Loan Officer
American Mortgage Solutions, Inc.
10602 Timberwood Circle Suite 3
Louisville, KY 40223
Company ID #1364 | MB73346
Text/call 502-905-3708 kentuckyloan@gmail.com
The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people.
