Conventional is great for those with a 20% down payment but what about First Time Home Buyers who don’t have 20% to put down?  Here are 3 Conventional loan programs that are great for first time home buyers!

There are 3 Conventional loan programs that I like when working with first time home buyers.

The first one is a true first time home buyer program.  Conventional normally requires a 5% down payment but as a first time home buyer it gets reduced to 3% as long as at least one of the borrowers is a first time buyer (has not owned in the most recent 3 years).  But there is a drawback…mortgage insurance.  Less down means higher risk to the lender and therefore the cost of MI goes up.  If we look at a mortgage insurance chart you’ll see that the MI rate increases between .2% and .4% in mortgage insurance cost.  If you have a credit score under 720 you may want to consider FHA instead.

Next up, if Freddie Mac’s Home Possible program.  This program does not require you to be a first time home buyer but is still a program I find works well for many first time buyers.  Down payment of just 3% but it does have income limits.  You have to be at or below the 80% of area median income but Freddie Mac has a lookup tool to help you identify the income limits.  One major advantage of the Home Possible program is lower cost mortgage insurance.  Reviewing the MI chart you’ll see that the typical coverage requirement is 30% but with Home Possible you can reduce that to 25% which lowers the cost of mortgage insurance just slightly.

The third option is Fannie Mae’s version of Home Possible called HomeReady.  Basically the same loan…3% down payment, 80% AMI income limits and lower cost mortgage insurance.

Is Conventional better than FHA? There is one major advantage of Conventional over FHA – cancellable mortgage insurance.  FHA, with min down of 3.5% on a 30 year fixed has MI for the entire life of the loan.  Conventional MI drops off when your loan balance reaches 78% of your purchase price or appraised value, whichever is less.  With minimum monthly payments that is normally a time period of 11 to 15 years. Most first time buyers move around 5 to 10 years after purchasing which means it is unlikely you will actually reach the point where the MI would drop off.  More importantly is looking at the loan terms such as rate, MI and therefore monthly payment when comparing these two options (FHA and Conventional).

Helpful Links & Related Videos:
CHFA Preferred
FHA vs Conventional:
What is Mortgage Insurance:
Down Payment Assistance Programs in Colorado

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