If you are looking for a medium down payment loan, one of the best options out there is a 10% down conventional loan with private mortgage insurance (PMI). If you can swing the 10% down and have a decent credit score, this is a better option than getting an FHA loan. The main reason 10% down conventional is so much better than FHA, is there is much lower mortgage insurance associated with the loan.
What is PMI? PMI is private mortgage insurance. Any time you put less than 20% down on a home purchase you are going to need some type of mortgage insurance. This is required to insure the lender against default and protect them against loss. Obviously the chance of the lender experiencing a loss if the borrow defaults is much higher with 5% or 10% down vs. 20% down.
Again 10% down conventional is better than FHA because there is less mortgage insurance. With a 10% down conventional loan you can have as low as a .44% PMI cost per month. Compare this with FHA which is 1.75% up front MI and a 1.25% monthly MI. Wow isn’t that a huge difference! The FHA up front MI is rolled into the loan balance and calculated on the loan balance. So if you have a $300,000 loan, the FHA up front MI is going to be $5,250, making you new loan balance $305,250. And you monthly MI is going to be $312/mo. Where with 10% down conventional you have NO upfront MI and your monthly MI is only $110/mo. So as you can see 10% down conventional is a better way to go if you can do it.
Conventional loans generally have more strict underwriting policies regarding credit score sand debt-to-income ratios. Not everyone can qualify for a conventional loan. This is why some borrowers only option is to go the FHA route. 5% down conventional is also a good option, but the monthly mortgage insurance will be higher than 10% down, about .67% for good credit borrowers.
I hope this article helps you understand PMI better and informs you of the benefits of a 10% conventional loan. I think this is the “sweet spot” with lending today. Don’t hesitate to call me at 858-922-7899 or email me at email@example.com if you have any questions.
The conventional loan limits go all the way up to $625,000 in much of California including Los Angeles, Orange County, San Francisco, San Jose and most of the Bay Area. San Diego conventional loan limits go to $546,250.
Sr. Loan Officer