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What is PITI? 

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If you’re getting ready to buy a home, you might hear the term “PITI” from your real estate professional. You might also come across it in emails with your lender or read it in your mortgage paperwork.

So what is PITI? Simply put, it’s an acronym that describes the four key components of your monthly housing costs as a homeowner. 

Specifically, PITI stands for: principal, interest, taxes and insurance.

Many people make the mistake of comparing the cost of their monthly rent and utilities with a monthly mortgage and interest payment. In this kind of flawed comparison, owning a home can often seem like the better deal. 

However, as evidenced by PITI, there is more to owning a home than paying a mortgage plus interest. Not even addressing utilities, you also have to factor in property taxes and insurance, which can definitely increase your monthly payments.  

That’s why it’s important to use a PITI loan calculator, like this one from our parent company LendingTree, and speak to your lender to find out what your actual PITI payments will be. Only then will you have a comprehensive idea of the true cost of homeownership. 

To help you get there, we’ll go into more detail below about each of these four components of a mortgage and what to consider before you buy a home. 

Principal 

Your home’s principal is the base amount of money you borrowed to buy it. So, if you financed $200,000 for a home, you have $200,000 of principal left to pay off. 

It’s very important to note that your entire mortgage payment will not be applied to your principal balance. Only a portion of it will. The rest of your mortgage payment will go toward interest, taxes and insurance. If you want to pay down your mortgage faster, you’ll have to send in extra payments and instruct your mortgage company to apply that cash to the principal, not toward future interest. 

Interest 

Interest is the cost you pay for taking out a loan. The bank charges you for lending you money in the form of interest. After all, if it lends you X dollars, that’s X dollars it can’t use itself. So there is a cost associated with lending. You’ll normally see interest in percentage form. (The interest rate on this loan is 4 percent.)  

Still, it can be difficult to understand how to calculate your interest rate and how that affects your mortgage payment. Here are some of the ways to determine your interest costs: 

There is also a difference between your mortgage interest rate and your APR. According to the Consumer Financial Protection Bureau, your APR (annual percentage rate) includes your mortgage interest and other charges like fees. So be sure to ask your lender to see your APR so you can get a sense of the total cost of your mortgage. Knowing APR is also a good tool to use to properly compare lenders, because some lenders charge higher fees than others even if they’re offering the same loan amount. 

Lastly, your interest payment will not be the same every month. This is called amortization, the gradual reduction of a debt by regular scheduled payments of interest and principal. Many first-time homeowners are surprised at how much of their mortgage payment goes toward interest and not principal. In order to plan ahead, ask your lender for a sample amortization schedule so you can get an idea of how much of your monthly payments will go toward interest and how much will apply to principal over time. As you pay down your interest costs, you’ll start to see the principal balance reduce more and more. 

Taxes

As a homeowner, you pay property taxes on your home. These funds are used to fund your local communities, including your local public schools, fire departments, police forces, libraries and more. 

Here is some information on property taxes and how your city determines them: 

  • Property taxes vary from one state to the next. 
  • A local tax assessor will determine your local property tax, but has no control over your state tax rate. You can also look up how to calculate property taxes to find out more information about your own home. 
  • You can check your property tax assessment every year to make sure there are no errors on it. In some areas, you’ll have an updated assessment every year, but in others, it could be every few years. 
  • There are many factors that impact your property tax rate. Some of these factors include improvements to your property, the price of similar homes in your area, and even things not related to your home, like state and local budget cuts 

Luckily, the property taxes you pay are often an income tax deduction, so that is one benefit to homeownership. 

Insurance 

The amount of insurance you pay as a homeowner really depends on where you live, how  much of a down payment you gave your lender, and what type of coverage you want or need. Below are three examples of common types of insurance that homeowners carry:  

  • Homeowners insurance: Homeowners insurance typically protects your home against damage caused by things like a house fire. Most homebuyers put their insurance payments in an escrow account ahead of time. Then, your bank uses the funds you put in the account to pay the insurance on your behalf. 
  • Flood insurance: Not all homeowners buy flood insurance. This will really depend on where your home is, and whether there’s a risk of flooding from hurricanes or being in a low-lying area. It’s important to do your research and get a flood certificate to find out if the property is located on a floodplain.  
  • Private mortgage insurance: If you can’t put 20 percent down on your house, some banks (but not all) will require you to pay for private mortgage insurance, also known as PMI. Some types of mortgages, like FHA loans, require such insurance.

What is not included in PITI payments?

Although PITI is comprehensive when considering how much it will cost you to own and operate your home, there are some other costs that aren’t factored in.

Below are some examples.

  • Utilities: Your utilities might include electricity, natural gas, water, trash collection and the like. 
  • Recurring subscriptions: Have you factored in things like cable, phone, internet, Netflix, etc. 
  • Homeowners association fees: If you live in a condo or in a neighborhood that shares the costs associated with common spaces or services, you might have to pay an HOA fee on top of your PITI costs. 
  • Home improvements: If you want to upgrade some part of your home, this will be an added cost. 
  • Home maintenance costs: You can predict basic home maintenance costs, like cutting the grass or fixing a leaky faucet. You can’t predict some of the larger expenses, like those arising from termite damage or a broken hot water heater.This is why it’s important to have an emergency fund before buying a home.

    Ryan Inman, a Las Vegas based financial adviser, often works with young families and potential homeowners. He says it’s important to pay attention to the non-PITI costs mentioned above. “My best advice to first-time homebuyers is to compare the amount of rent and utilities you are paying now with how much PITI, HOA fees and utilities will be on a home,” he tells MagnifyMoney. 

“Save the difference for three to six months, and see how your lifestyle is affected. 

The key to Inman’s strategy is figuring out if you can maintain a comfortable lifestyle (no dramatic changes or sacrifices) on your mock homeowner’s budget. If it’s no problem, then you might be ready for homeownership.  

“Also, factor in that you will now be responsible for maintaining the home,” he adds. “There is no rule for how much this can be,” since it really depends on the age and quality of the home, “but it could be costly.” 

Next steps: 

Now that you understand more about what PITI stands for and represents, it’s time to do your research. Remember, you can calculate your total mortgage PITI payment by using a PITI payment calculator 

When you get your results using the PITI payment calculator, don’t forget to add in the uncounted items mentioned above, like home maintenance costs and utilities. 

It’s also important to have a cash buffer for unexpected emergencies so you don’t go into debt fixing a flooded basement or addressing significant damage from a storm. 

If you do all of this, you’ll have an excellent idea of what your cost of homeownership will be. If you feel comfortable with this cost and are convinced you’re set to handle anything unexpected that might pop up, then you’re well on your way to becoming an owner. 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Cat Alford
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Cat Alford is a writer at MagnifyMoney. You can email Catherine at [email protected]

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The Guide to Getting a Mortgage After Foreclosure

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Home foreclosure rates have reached their lowest points in nearly two decades. Just 4% of mortgages nationally are in some stage of delinquency, including foreclosure, according to the latest analysis from real estate data firm CoreLogic. Still, this adds up to thousands of homeowners facing this type of loss every year.

If you’ve recently gone through a foreclosure, it’s never too early to start preparing your finances and credit profile to re-enter the mortgage market. You’ll have to wait up to seven years before your credit score recovers, but there’s plenty to do in the meantime.

There are several mortgage options available with varying eligibility requirements, and some have shorter waiting periods that you may be able to take advantage of, if you qualify. This article will guide you through getting a mortgage after foreclosure.

How foreclosure affects your credit

Having a mortgage foreclosure on your credit reports is a major credit event that negatively affects your credit history and scores. Your credit scores could suffer a 100-point drop, or more.

The three major credit reporting bureaus — Equifax, Experian and TransUnion — begin reporting your foreclosure once a lender says you’ve missed your first payment. That’s when the seven-year time clock starts ticking.

Research from Fair Isaac Corporation, the company that created FICO scores, found that a hypothetical consumer who had a 780 credit score before a foreclosure could see their score decline by 140 to 160 points, to a range of 620 to 640, once the foreclosure hits their credit profile. A consumer who started out with a 680 credit score could see their score drop to a range of 575 to 595 after foreclosure.

Most mortgage programs have a required minimum credit score that ranges from 580 to 640 to qualify. Most also have set waiting periods for prospective homebuyers who have lost a home to due to foreclosure before they can apply for a new mortgage.

How to get approved for a loan after foreclosure

Each mortgage program has its own set of guidelines and requirements for buyers pursuing homeownership again after suffering a foreclosure. Keep reading for a rundown of how each program handles past foreclosures.

Conventional loans

Conventional loans are mortgages that aren’t guaranteed or insured by any federal agency. However, they are generally purchased by government-sponsored entities Fannie Mae and Freddie Mac, and thus conform to their guidelines. They usually have higher credit and income standards than government mortgage programs.

In order to qualify for a conventional mortgage after going through a foreclosure, you must first complete the required waiting period. The standard waiting period for conventional loans is seven years. However, extenuating circumstances may qualify you after three years.

Fannie Mae defines extenuating circumstances as isolated events that are beyond a borrower’s control and lead to an income reduction or increase in financial obligations, such as a job loss. You will need to provide your loan officer with a letter explaining why you had no reasonable alternatives other than defaulting on your mortgage.

Freddie Mac requires loan files with extenuating circumstances to contain the following information:

  • A written statement about the cause of your financial difficulties to explain the outside factors beyond your control.
  • Third-party documentation confirming the events detailed in your statement were an isolated occurrence, significantly reduced your income and/or increased expenses, and rendered you unable to repay your mortgage.
  • Evidence on your credit report and other documentation in the mortgage file of the length of time since completion of your foreclosure to the date of application and of completion of the recovery time period requirements.

Generally speaking, conventional lenders require a minimum credit score of 620 and a maximum debt-to-income ratio of 45%. A traditional down payment is 20%, though it’s possible to qualify for certain conventional loans with a down payment as low as 3%. Borrowers who make down payments of less than 20% are responsible for paying private mortgage insurance as part of their mortgage payments.

FHA loans

Insured by the Federal Housing Administration, FHA loans are often one of the first options foreclosed-upon borrowers turn to. If you’ve gone through a full foreclosure and repaired your credit, you may be eligible for an FHA loan in just three years.

In most cases, borrowers must have at least a 580 credit score and a 3.5% down payment to qualify for an FHA loan. The absolute minimum credit score is 500, though the minimum down payment increases to 10% of the home price for anything less than 580. The maximum debt-to-income ratio is 43%, though borrowers with higher DTI ratios can be approved with compensating factors.

Although FHA loans require significantly lower down payments and look for lower credit scores than conventional mortgages, most loans are insured by annual and upfront mortgage insurance premiums, which will increase your monthly mortgage payment.

Upfront mortgage insurance premiums cost 1.75% of the loan amount for the majority of FHA loans. Annual mortgage insurance premiums cost between 0.45% and 1.05%, depending on the mortgage term, loan amount and down payment percentage. And unless you put down 10% at closing, you’ll pay annual mortgage insurance for the life of your FHA loan. The only other option to get rid of mortgage insurance is to refinance into a conventional mortgage after building at least 20% equity.

VA loans

VA loans are guaranteed by the U.S. Department of Veterans Affairs and allow veterans and active military members to purchase a home with as little as zero down payment. It’s a compelling benefit, but an underutilized one: 1 in 3 home-buying veterans doesn’t realize they have a homebuying benefit.

Depending on your service commitment and duty status, you may be eligible for a VA loan after foreclosure. This program also allows veterans who have experienced foreclosure to get a new loan more quickly than other programs — the waiting period is only two years.

An important thing to note is that if you borrowed a VA loan to purchase the home you lost to foreclosure, you lose your entitlement, or the loan guaranty that protects the lender in the event you default on the VA loan. During the foreclosure process, the VA must pay a claim to your lender equal to the amount of your entitlement.

To have your VA entitlement restored after foreclosure, you’ll need to repay the VA in full for the claim amount it previously paid out to your lender, in addition to completing the waiting period. This must be done before you can again qualify for a VA loan.

Although VA loans are more lenient on credit history than conventional loans, lenders generally look for a credit score of at least 620.

USDA loans

The U.S. Department of Agriculture provides guaranteed loans to low and moderate-income homebuyers looking to purchase a house in a designated rural area. Eligible borrowers can use the loan to build, improve and rehabilitate or relocate a home.

It’s possible to qualify for a USDA loan after a foreclosure with a three-year waiting period. You must have at least a 640 credit score, though you may be approved with a lower score. The maximum debt-to-income ratio is 44%.

Use the USDA’s property eligibility tool to determine whether an address falls within a designated rural area.

Non-QM loans

For borrowers who don’t fit the standards for conventional loans or those backed by the federal government, another product has emerged — non-qualified (non-QM) loans. These loans are backed by hedge funds and private equity firms, and the additional risk associated with them usually is reflected in larger down payments or higher interest rates.

With non-QM loans, a lender’s primary concern is your ability to repay, and many don’t require a waiting period for foreclosed-upon borrowers.

Depending on how much time has passed since your foreclosure, most loans require at least 20% down, enough money in the bank as a reserve to cover future payments, and an extensive history of documented income.

For example, Atlanta-based non-QM lender, Angel Oak Home Loans, has a program specifically dedicated to serving foreclosed-upon borrowers with bad credit. Their Home$ense program was created specifically for homebuyers who were caught in the recession and mortgage crisis.

Home$ense allows you to begin the application process immediately after your foreclosure has settled. They offer 5/1 adjustable-rate mortgages and 30-year fixed-rate mortgages, each requiring a minimum 10% down payment. The minimum credit score needed to qualify is 500, and they can approve up to $1 million for your loan.

Comparing mortgage costs after foreclosure

A foreclosure can majorly damage your credit score — and your score is a primary factor that lenders determine the interest rates they’ll offer you. Even a small change in mortgage rates can have a big impact on the amount you’ll pay.

For a score that went from 780 down to 620 after foreclosure, your monthly and lifetime costs increase significantly on both conventional and FHA mortgages.

The example below assumes a 30-year mortgage on a $200,000 home with a 20% down payment, or $40,000.

Conventional loan

 780 credit score620 credit score
Loan amount$160,000$160,000
Interest rate3.84%5.43%
Monthly payment$749.18$901.45
Total interest cost$109,705$164,521
Total loan cost after 30 years$269,705$324,521

The difference in interest for conventional loans at each credit score is nearly $55,000.

The next example assumes a 30-year FHA mortgage on a $200,000 home with a 3.5% down payment, or $7,000.

FHA loan

 780 credit score620 credit score
Loan amount$193,000$193,000
Interest rate3.84%5.43%
Monthly payment$903.70$1,087.37
Total interest cost$132,331$198,454
Total loan cost after 30 years$325,331$391,454

The cost difference between the two credit score tiers is just over $66,000.

Based on these examples, you can potentially save money by waiting to buy a home until you’ve improved your credit score above 620.

Remember, your credit score, home price and down payment will all affect your interest rate. It’s also important to ask about points, mortgage insurance and closing costs, which are not included in these examples.

Financial risks after foreclosure

Foreclosures have financial impacts that can stretch beyond the damage done to your credit scores. If you’ve had a foreclosure, you need to be aware of the risks associated with deficiency judgements. This is when your mortgage lender tries to recoup any losses they incurred after selling your home in a foreclosure auction.

In some states, lenders have the ability to hire debt collectors to go after your remaining debt, court fees and attorney’s fees, plus any interest that has accumulated.

How does a deficiency judgement work? Say you originally took out a mortgage loan of $250,000, but the value of the home decreased to only $150,000 after the financial crisis. If you foreclosed at that point and your lender sold your home at its current value, the $100,000 difference between the loan balance and the price it sold for would be the deficiency balance.

Although deficiency judgements are not a common problem right now, they could come back to haunt you once you’ve recovered from a foreclosure, secured a better job and have started rebuilding savings. Deficiency judgements are still allowed in most states, and the statutes of limitation range from 30 days to 20 years.

You won’t know it’s coming until you receive a court notice, and many times your debt will no longer be with the original lender. Interest may become one of the largest expenses, especially if your debt is old. And once there is a judgement, you’re on the hook for the unpaid balance.

Boosting your approval chances after foreclosure

Regardless of which type of mortgage you decide to pursue after foreclosure, cleaning up your finances will help the entire process go more smoothly. Consider the following tips to help boost your chances at mortgage approval.

Pay down credit card debt
Paying off your credit card debt completely is one of the fastest ways to improve your credit scores. But if you can’t quite pay it all off yet, work on paying down each card to a balance that equal less than 30% of your credit limit. Once you’ve paid down your credit card debt, you should see the change reflected in your credit score in a couple months.

Don’t apply for other credit
Resist the temptation of increasing your debt burden by applying for additional credit products. This includes car loans, store-branded credit cards and other types of financing. Your debt-to-income ratio is one of the most important factors lenders look for when trying to determine your eligibility for a mortgage — it’s arguably more important than your credit score.

Avoid new blemishes on your credit report
Prioritize establishing and maintaining on-time payments for all your debt obligations. You wouldn’t want to begin new waiting periods for negative events to be removed from your credit reports again.

The bottom line

Losing a home to foreclosure can be a devastating experience, but don’t let it stop you from trying your hand again at homeownership in the not-too-distant future. It’s important to take time to explore all available options, selecting a program that best fits your current financial situation and securing the best possible terms.

Our guide was designed to offer you a comprehensive overview of the options that are currently available, but it’s always a great idea to conduct a bit of your own research. As more borrowers prepare to enter the market in the coming months and years, additional mortgage options may continue to emerge.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Couple Celebrating Moving Into New Home With Champagne

Not all homebuyers have the money to make a traditional 20% down payment. The perception that you need one is one of the main financial obstacles that can discourage people from pursuing homeownership.

In reality, there are several options for buyers who want to get a mortgage but can only pull together a small down payment. One of the best ones, particularly for first-time homebuyers, is an FHA loan.

This article offers you a guide to getting an FHA mortgage, including details on how to qualify and the costs to consider.

Understanding the FHA mortgage program

FHA mortgages are insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development. The program is a key way that people of moderate income can become homeowners. Nearly 83% of homeowners who borrowed an FHA loan in 2018 were first-time homebuyers, according to a report from HUD.

FHA mortgages are funded by FHA-approved lenders and then insured by the government. This backing protects lenders from loss if borrowers default. Because of this protection, lenders can be more lenient with their qualifying criteria and can accept a significantly lower down payment.

You can get approved for an FHA mortgage with as little as a 3.5% down payment and a credit score of 580. You may also qualify with a credit score as low as 500, though you’ll need to put down 10% instead.

On a $200,000 home, that comes out to a down payment of $7,000 to $20,000 when taking out an FHA loan, depending on your credit score.

Keep in mind you’ll also be responsible for closing costs, which typically cost 2% to 5% of a home’s purchase price. Closing costs are necessary to complete your transaction, and include services such as appraisals and home inspections. However, you may be able to negotiate to have some of these costs covered by the seller.

Is an FHA loan right for you?

FHA loans are particularly suited for several different types of homebuyers.

First-time homebuyers, who often have lower credit scores and smaller available down payments, tend to gravitate to FHA loans. Additionally, boomerang buyers — people who lost a home in the past due to a bankruptcy, foreclosure or short sale — might also benefit from an FHA loan.

Negative credit events such as foreclosure can drop credit scores by more than 100 points in many cases, and there’s typically a waiting period of three years before you’re eligible to buy a home again. Once that’s up, the lower credit score requirements of the FHA loan program could help you become a homeowner again.

Types of FHA mortgages

The FHA offers both 15- and 30-year mortgages, each with fixed rates or adjustable rates.

With a fixed-rate FHA mortgage, your interest rate is consistent through the loan term. You know what your principal and interest payment will be for the life of the mortgage. However, your overall monthly payment may increase or decrease slightly based on your homeowners insurance, mortgage insurance premium and property taxes.

Adjustable-rate FHA mortgages start out with a low and fixed interest rate during an introductory period of time, usually five years. Once the introductory period ends, the interest rate will adjust annually, which means your monthly mortgage payments may increase based on market conditions.

A unique situation where signing up for a low, adjustable-rate FHA mortgage could make sense is if you plan to sell or refinance the home before the introductory period ends and the interest rate changes. Otherwise, a fixed-rate FHA mortgage has predictable principal and interest payments and may be the better option.

FHA loan limits

The FHA imposes a limit on the amount of money that homebuyers are allowed to borrow each year. For 2019, the FHA loan limits for one-unit properties are $314,827 in most U.S. counties and $726,525 for high-cost areas. You can find your county’s loan limit information for one- to four-unit properties by using the FHA’s lookup tool.

Qualifying for an FHA loan

Besides the low down payment, an undeniable benefit of the FHA mortgage is the low credit score requirement. You may qualify for a 3.5% down payment with a credit score of 580 or higher. You can qualify with a minimum credit score of 500, but you’ll have to make at least a 10% down payment.

Your debt-to-income (DTI) ratio is another key metric lenders use when determining whether you can afford a mortgage. DTI measures the percentage of your gross monthly income that is used to repay debt. Lenders consider two DTI ratios when determining your eligibility — the front-end (housing debt) ratio and the back-end (total debt) ratio.

Your front-end ratio is the percentage of your income it would take to cover your total monthly mortgage payment. Lenders typically like to see a front-end ratio of no more than 31%.

Your back-end ratio illustrates the percentage of your income that covers your total monthly debts. Lenders prefer a back-end ratio of 43% or less, but may approve a higher ratio if you have compensating factors, such as a higher credit score or a larger down payment.

You’ll also need to have a steady income and proof of employment for the last two years. Additionally, the home you’re purchasing via FHA must also be your primary residence, at least for the first year.

FHA mortgage insurance

At first glance, an FHA mortgage probably seems like the ultimate hack to buying a home with minimal savings. The flip side to this is you must pay mortgage insurance premiums (MIP) in exchange for your lower down payment.

Remember, FHA-approved lenders offer mortgages that require less money down and flexible qualifying criteria because the Federal Housing Administration will cover the loss if you default on the loan. The government doesn’t do this for free.

FHA mortgage borrowers must “put money in the pot” to cover the cost of this backing through upfront and annual mortgage insurance premiums. The upfront insurance premium costs 1.75% of the loan amount and can be rolled into your mortgage balance.

The annual mortgage insurance premium is divided into 12 installments and paid monthly as part of your mortgage payment. The annual premium ranges from 0.45% to 1.05%, based on your loan term, loan amount and loan-to-value ratio (LTV).

Your LTV is a metric that compares your loan amount to your home’s value. It also represents the equity you have in the property. For example, putting 3.5% down means your LTV would be 96.5%. In other words, you have 3.5% equity in the home, and your loan is covering the remaining 96.5% of the home value.

Here’s the annual MIP on a 30-year FHA mortgage (for loans less than or equal to $625,500):

  • LTV over 95% (you initially have less than 5% equity in the home) – 0.85%
  • LTV under 95% (you initially have more than 5% equity in the home) – 0.8%

As you can see, starting off with a smaller down payment will cost you more in mortgage insurance premiums. Additionally, in most cases, you’ll pay annual MIP for the life of your loan.

However, if your LTV was less than or equal to 90% at time of origination — meaning you made a down payment of at least 10% — you can cancel MIP after 11 years.

FHA loans vs. conventional loans

Government-backed home mortgages like the FHA loan are special programs serving borrowers who might not qualify for a traditional mortgage.

Conventional mortgages are offered by lenders and banks and typically follow Fannie Mae and Freddie Mac’s mortgage standards. Fannie and Freddie are government-sponsored enterprises that buy loans from mortgage lenders and banks that fit their requirements.

The qualifying criteria bar for conforming loans is usually set higher. For instance, you typically need to have at least a 620 credit score to qualify for a fixed-rate conventional loan. However, credit score minimums vary by lender, but in any case, a score above 620 will be necessary for the most competitive interest rates.

A misconception about conventional mortgages is that borrowers must have 20% for a down payment to qualify. Mortgage lenders may accept less than 20% down for a conventional mortgage if you have a high credit score and pay their version of mortgage insurance premiums, which is called private mortgage insurance (PMI).

Similar to FHA mortgage insurance, PMI is a private insurance policy that protects the lender if you default. Be careful not to confuse the two types of insurance policies.

If you have PMI on a conventional mortgage, you’re able to request the removal of those insurance payments when you build up 20% equity in your home. On the other hand, the mortgage insurance premiums for most new FHA mortgages can’t be removed unless you refinance.

When to choose a conventional mortgage instead

Choosing an FHA loan can be a shortcut to homeownership if you don’t have much cash saved or the credit history to get approved for a conventional mortgage. Still, the convenience comes at a price that can follow you for the entire loan term.

Furthermore, putting a small sum down on a home means it will take you quite some time to build up equity. A small down payment can also increase your monthly payments and interest rate.

Homebuyers with a strong credit score should consider saving a bit more money and shopping for a conventional home loan first before thinking an FHA mortgage is the only answer to a limited down payment.

If you plan to put down at least 5% toward your home purchase and have a good or excellent credit score, it might make sense to borrow a conventional mortgage instead. A conventional home loan with PMI may not require the same upfront insurance payment as the FHA home loan, so you can find some savings there. Plus, you’re capable of getting rid of PMI without refinancing.

There are a few conventional mortgage programs that allow a 3% down payment, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible program. These products also have cancellable mortgage insurance.

Shopping for an FHA loan

So, you’ve reviewed all the information and determined that an FHA loan is right for you. Once you’re ready to start the homebuying process, one of the most important things on your to-do list is shopping around.

Gather quotes from multiple FHA-approved lenders to find the most competitive rate. If you’re unfamiliar with the approved lenders in your area, you can use the HUD’s lender list search to locate them.

Comparison shopping for the best mortgage rate can save you thousands in interest over the life of your loan, according to research from LendingTree, which owns MagnifyMoney. Be sure you also compare the various other costs associated with borrowing a mortgage, including lender fees and title-related expenses.

Don’t rush to a decision. If you’re still not sure which mortgage type will be the most cost-effective for you, ask each lender you shop with to break down the costs for a comparison.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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