When buying a new home with a low 3-10% down payment there are far better ways than FHA.
The common misconception among consumers and real estate professionals is that when purchasing a new home with a low down payment FHA is the only option. But that just isn’t the case. There is no doubt that FHA has become immensely popular in recent years with its lose underwriting guidelines. But its also managed to overshadow the facts regarding conventional lendings (Fannie Mae & Freddie Mac) low down payment requirements.
You see with Fannie Mae borrowers are able to purchase property with as little as 3% down. And with Freddie Mac the requirement is just 5% down. That means that Fannie Mae actually requires 0.5% lower down payment on their purchases than FHA does. Interesting, right?
Okay, okay so a .05% is great and all but are there any other benefits to going conventionally?
Well the biggest benefit for most new home buyers is that you no longer need to worry about whether the property you’re looking at is FHA approved. Most properties like condominiums, town homes or planned urban communities (PUD’s) have homeowners associations. Most homeowners associations are not FHA approved. That means that as a FHA buyer your choices can be very limiting. And in most cases you may not be able to purchase the home you want. Not with conventional financing.
It also means that you no longer have to pay outrageous mortgage insurance rates. FHA’s typical annual mortgage insurance rate is 1.25%. And that is for the life of the loan. With conventional financing the MI rates are much lower. And in some cases its even non-existent through lender paid MI programs. That difference can equate to an annual savings of hundreds even thousands.
And lets not forget all the red tape as well as the rigorous requirements that come along with obtaining an FHA property inspection. These have been known to cause a myriad of delays and out of pocket expenses. This is not the case with conventional financing.
The bottom line is that FHA financing can be great for those who truly need more flexible guidelines. But if you have the option you may want to think twice about whether you want that FHA loan.