From Realtor Magazine
FHA-insured financing used to be a big draw for first-time home buyers with its offerings of lower down payments. But more first-time buyers lately are opting for conventional mortgages instead, according to the National Association of REALTORS® Economists’ Outlook blog.
Fifty-nine percent of first-time buyers obtained conventional conforming loans in January, whereas 24% obtained FHA-insured mortgages, according to the REALTORS® Confidence Index Survey. For 2020, 57% of first-time buyers obtained conventional financing.
In 2014, Fannie Mae and Freddie Mac began offering finances for mortgages with a 3% down payment, similar to FHA loans. That has opened the door to more first-time buyers.
But there may be other financial reasons for first-time buyers to consider conventional financing. FHA mortgage insurance can be more expensive than private mortgage insurance, NAR notes on its blog.
For mortgages that meet Fannie Mae and Freddie Mac’s guidelines with conventional financing, “the borrower does not have to pay private mortgage insurance when the equity reaches 80%,” explains Gay Cororaton, senior economist for NAR, at the association’s blog. “In the case of a FHA-insured mortgage, a borrower obtaining a 30-year fixed-rate mortgage with 96.5% LTV will continue paying a monthly mortgage insurance premium for the life of the loan. In addition, the borrower pays an upfront mortgage insurance premium (UPMIP) at the time the mortgage is obtained, although the UPMIP can be rolled into the loan.”
Cororaton offers an example using a $300,000 home financed with a 2.7%, 30-year fixed-rate mortgage with a PMI of 1.5%. A borrower with an FHA-insured mortgage pays $43,797 over the life of the loan in mortgage insurance compared to $31,908 for a loan backed by Fannie Mae and Freddie Mac (also where the borrower stops paying the monthly private mortgage insurance in the ninth year when equity reaches 20%). A borrower with an FHA-insured mortgage pays interest of $3,380 if they roll the upfront mortgage insurance payment of $5,356, Cororaton says.
