Are you a first time home buyer that has questions about mortgage insurance when buying a house? What is mortgage insurance? Who has to pay mortgage insurance? Who does mortgage insurance protect? Is mortgage insurance the same for all loan types? In this episode, we are going to give you mortgage insurance 101 when buying a home in addition to discussing when you can get rid of mortgage insurance once you have it so that we can help you become The Educated HomeBuyer.
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Example We Discussed:
What’s it look like for a minimum down, median purchase $467,700 (Q4 2022
- FHA –
- $451,331 base loan
- Add UFMIP of 1.75% – $7898
- Total loan amount – $459,229
- Monthly MI – $210
- Conventional 3%
- $453,669 loan
- 2 borrowers – SFR – 740 – dti under 40% – .47% – $177.69
- 1 borrower – SFR – 680 – dti under 40% – 1.35% – $510.38
- Conventional 5%
- $444,315 loan
- 2 borrowers – SFR – 740 – dti under 40% – .30% – $111.08
- 1 borrower – SFR – 680 – dti under 40% – 1.03% – $381.37
- VA – No monthly MI
- $467,700 base loan
- Add UFMIP of 1.0% – $4677
- Total loan amount – $472,377
- Monthly MI – $137.78
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: email@example.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
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👕 – Merch – https://jebsmith.myspreadshop.com/
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For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: We’re always getting questions around mortgage insurance. What is mortgage insurance? If I have it, how do I get rid of it? How do I lower the cost of mortgage insurance? Can I shop it and I have your back. We’re gonna spend today’s episode and talk in detail about mortgage insurance.
Let’s call it mortgage insurance 101, to give you everything you really need to know about mortgage insurance when getting a loan to buy a home, so that, again, you’re the educated home buyer. Josh, let’s start today. Really simple definition. What is mortgage insurance?
[00:00:35] Josh Lewis, Certified Mortgage Consultant: It is insurance that you pay for one way or the other, and we’ll go through all the ways that you can potentially pay for it, that protects the lender in the event that you default.
And you say protects them against what? Historically, before mortgage insurance, you needed to put at least 20% down. And that gives a cushion, first of all, some skin in the game for you, but also a cushion for the lender. If you stop making your payments, interest’s gonna accrue, there’s gonna be penalties in addition to the interest. They’re gonna have legal fees to try and foreclose on the property and get possession of the property so they can sell it and get their money back.
So all of that is to say Standard & Poor’s has a number that they say a lender on average will pay 26% of the value of the loan to complete the foreclosure process.
So, What does mortgage insurance do? When you don’t have the 20% to make the lender comfortable with taking that risk, they’re gonna come in and insure the difference between the 3%, 5%, 10% that you’re gonna put down so that the lender has a comfort level there, that they will make the loan and that they will come close to being made whole in the rare chance that you should default on the loan.
[00:01:43] Jeb Smith, Huntington Beach Realtor: Okay, so let’s start really early on here and ask the question, is it only required on loans when you’re putting less than 20% down?
[00:01:53] Josh Lewis, Certified Mortgage Consultant: I can’t think of any situation where a lender requires it uh, with more than 20% down. I do have a bank that is a jumbo lender that they will require it up to 25%, but they pay for it.
So totally different thing, but that’s really the only situation where I can consider of a lender that I know that requires it in all practical purposes. Borrower facing, never seen a situation. Where a borrower putting 20% down has to pay for mortgage insurance.
[00:02:20] Jeb Smith, Huntington Beach Realtor: And also something to understand, I think very early on into this episode is if you’re putting less than 20% down, you’re paying mortgage insurance in one way or another, right?
So even if a lender is quoting you a rate and they’re saying This is a rate, you’re not having to pay mortgage insurance. This is a loan we offer. No one else does it. There’s no mortgage insurance on it, there’s no way they can send that loan to Fannie and Freddie and not have the mortgage insurance on it.
Josh, when I say that, let’s explain it in a little bit more detail for anybody out there that might be shopping for a loan, putting less than 20% down and might be having these conversations [00:03:00] where one person is saying you have to have mortgage insurance, and another is saying, Nope, you don’t.
[00:03:05] Josh Lewis, Certified Mortgage Consultant: Any loan that is not a non-conforming or jumbo loan that’s gonna go to Fannie and Freddie, as you said, has to have mortgage insurance. So if you are not seeing it, if you’re not paying it as a line item, it is included in the interest rate. And by that, what do I mean? We’ve talked before on the show about getting a lender credit.
You can’t pay all your closing costs, so the rate is 6% today, but if you take six and a quarter, the lender will give you 1% of the loan to help you offset your closing costs. In this instance, maybe they say cool, we don’t need mortgage insurance. Take a six and a quarter rate and we’ll use the extra profit from the higher interest rate, and we will buy mortgage insurance.
But one way or the other, it’s going to be in there. So it’s either borrower paid, you’re paying it, and you see it on your statement, or it’s lender paid, and it’s already built into the profit equation for the interest rate that you are paying on your loan.
[00:03:55] Jeb Smith, Huntington Beach Realtor: Okay. And so before we start talking about how to remove mortgage insurance, how to get rid of mortgage insurance, that sort of thing, let’s talk about how it varies across different types of loan programs.
I think it’s important to know, depending on what type of loan you’re getting the mortgage insurance calculation is going to be a little bit different. Some lenders have upfront mortgage insurance which I think is also important to note. So let’s start with probably the loan program that’s more associated with first time home buyers than any other loan program out there, Josh, and that’s FHA loans.
So FHA only requires a three and a half percent down payment. But in addition to that, there are a couple of things that FHA require that make it in some cases a little less attractive than say, a conventional loan, which we’ll compare the two here in just a moment.
But what does mortgage insurance look like on an FHA loan?
[00:04:48] Josh Lewis, Certified Mortgage Consultant: FHA is a great one to start with cuz it’s gonna give us a baseline for looking at everything else. And people will often say, Hey, I wanna go FHA because the mortgage insurance is cheaper. The mortgage insurance, for the most part on an FHA loan is not cheaper.
It’s just that the biggest portion of it is transparent to you. As you said, Jeb, there’s an upfront mortgage insurance premium. They charge 1.75% of the loan and it’s transparent because it gets added onto your loan. So what does that mean? You put 3.5% down and that’s your base loan amount, the 96.5% of your purchase price.
But then they’re gonna add 1.75% of that back on, and that money goes to the FHA mortgage insurance fund. So they have a lump sum right when you close. Then on top of that, you’re gonna pay the monthly mortgage insurance, and that’s 0.55%. We’re super lucky. We just got a reduction on that for the first time in 15, 16 years, it went from 0.85% to 0.55%.
So FHA, in terms of a monthly payment for all but the most well qualified borrowers, meaning multiple borrowers, very good credit, low debt to income ratio is going to have the lowest payment because an FHA interest rate is generally about a half percent lower than a conventional, [00:06:00] that 0.55% mortgage insurance is gonna be lower than most mortgage insurance premiums that we’ll talk about for conventional loans.
So you’re gonna pay 1.75 upfront. It is financed into the loan. You don’t write a check for that just is added into your transaction, and then you’re gonna pay 0.55% per month. Now we should say Jeb, if you do more than the minimum three and a half percent down, so 5% or more down, they will drop 0.05% off that.
So it goes from 0.55 to 0.50. And if you’re in a high cost area like Southern California, you pay a premium if the loan amount is over $726,200. In a high balance area where you can get those larger loans, you’re gonna pay 0.75% each month instead of the 0.55%.
[00:06:42] Jeb Smith, Huntington Beach Realtor: And with that, Josh, if I’m a buyer buying a home, I only have 3.5% down. Maybe I have more. Maybe I have 15-20% down and I still use an FHA loan for whatever reason. Maybe just circumstances, I have low credit. I need higher debt to income ratios. FHA ends up being the best option for me. Do I still have to pay mortgage insurance even if I have a larger down payment with FHA?
[00:07:11] Josh Lewis, Certified Mortgage Consultant: Always required on an FHA. You know, we’re gonna get to this, but it’s probably a good time as any Jeb. The only real benefit that you get by putting more than the minimum down is again, at 5% or more down the mortgage insurance monthly drops 0.05%.
If you put 10% or more down, the mortgage insurance will drop off after 11 years. Other than that, less than 10% down, every FHA loan will have mortgage insurance monthly for the life of the loan. Nothing you can do to get rid of it. Value can double. You can make a $200,000 principle reduction.
It does not matter. The monthly mortgage insurance will always remain on that loan unless you’ve put 10 or more percent down.
[00:07:52] Jeb Smith, Huntington Beach Realtor: Now, I know a lot of you guys are listening and you probably have decided what type of loan program you’re going to do but I would say bear with us as we go through these different types of loan programs.
So even if FHA is the way you’re going to go, and we’ve talked about FHA a little bit. We’re gonna talk about conventional, we’re gonna talk about VA and USDA, but then we’re also going to do some comparisons towards the end of this episode in real terms, what it actually means, what it looks like on paper with these different types of loan programs.
Cuz again, one thing I talk about often is talking to lenders and having them compare loans side to side. Even if you have a minimal down payment, maybe you have five, 10% down and you think conventional is the best option and in most cases it probably is.
But it’s always good to get a comparison side by side with another loan program out there just to see what the numbers look like so that you can make the best decision. So with that said, bear with us here. We’re gonna go through conventional and a couple other programs, and then we’ll give you some comparisons and answer some questions around removing mortgage insurance.
So, Josh, conventional loans, what do we look like with conventional?
[00:08:54] Josh Lewis, Certified Mortgage Consultant: So probably the best thing that we can say, Jeb, about FHA mortgage insurance is it’s simple, [00:09:00] right?
[00:09:00] Jeb Smith, Huntington Beach Realtor: No, for sure.
[00:09:00] Josh Lewis, Certified Mortgage Consultant: If you qualify for the loan, we look at your down payment and this is what your mortgage insurance is. Now, on a conventional loan, we’re gonna start looking at a ton of different factors.
So let’s start by saying, on a conventional loan, we can have , your option of three different types of mortgage insurance. Most people don’t know you can pay a single premium mortgage insurance, meaning you pay a lump sum at closing, one and a quarter, 1.75, 2.5% at closing, and then you don’t have monthly mortgage insurance.
You just paid that lump sum upfront and you bought life of loan mortgage insurance for your lender. So it’s cool. Keeps your, payment down. You’re gonna pay more at closing. It keeps your payment down. Problem is it’s a sunk cost. There are refundable mortgage insurance policies, but again, you’re gonna start to see it gets fairly complex.
What I can say is these are not done very often because most of our first time buyers don’t have an extra lump sum sitting around. And there’s other things we can do with it. If it’s a 2% upfront premium and you’re putting 3% down, maybe we’re better doing 5% down and getting to a lower mortgage insurance rate.
So what are some of the other things that we look at on a conventional loan? I shouldn’t say that. Let’s say, What are the other options on a conventional loan we have the monthly mortgage insurance. So you don’t pay a lump sum upfront, you just pay it monthly. So that 0.55% on an FHA loan, you have that option of just paying the monthly, so nothing gets added into your loan, you’re just paying a monthly rate.
We also have the option of a split premium. Where you pay a smaller amount at closing and it reduces that monthly payment, or it reduces the coverage that’s required. I can’t tell you when the last time was that I either did an upfront premium, single premium mortgage insurance or a split premium.
They can be used and they can be used successfully. There’s a time and a place, but 99.9% of conventional loans are done with monthly mortgage insurance. And the reason why, we talk about numbers never lie, the reason why it’s really important versus you saying I’ve looked at it, I wanna go conventional. I hate FHA, or I’ve looked at it, FHA is better for me I don’t even wanna look at conventional.
We need to look at it because there’s a number of factors that go in. When we plug into the mortgage insurance calculator on a conventional loan, what are the things we’re looking. loan to value. So the more you put down up to 20% where it goes to zero it’s gonna go lower on the mortgage insurance.
The higher your credit scores go all the way to 800, the lower your mortgage insurance are gonna go. If there’s two borrowers, it’s gonna go lower than a single borrower. The mortgage insurance company likes that we have more than a single potential point of failure there.
One borrower gets hit by a bus, no one can make that payment. If there’s two borrowers, one gets sick, the other one can hopefully still make those payments.
We have property type. It can be a little bit more expensive for a condo or a 2, 3, 4 unit building versus a single unit building.
Debt to income ratio. So we’ve talked about, we did an episode just a week or so back, Jeb, that you can go as high potentially as a 50% debt to income ratio on a conventional loan.
If you need mortgage insurance, it’s going to make your mortgage insurance more expensive. So since I cannot tell you a number of what mortgage insurance would look like for you with a 3% or a 5% down, let’s talk about a range. The lowest mortgage insurance I’ve done in the [00:12:00] last 12 months, I’m not saying this is the lowest anywhere, but I haven’t seen a quote in the lower than this was 0.11%.
Very well qualified borrower putting 15% down. Okay? The worst I’ve seen, the highest I’ve seen in the last few years had a borrower buy an investment condo a few years back, and he had pretty darn good credit, but that was, I think, 1.45%. So it tells you a pretty darn big range of what that monthly mortgage insurance could look like.
[00:12:24] Jeb Smith, Huntington Beach Realtor: Now, you guys often hear me either here or on YouTube pitching the idea or trying to get you to guys to believe the idea that you need to get pre-approved versus pre-qualified.
You need to go through the full process when you’re talking to a lender. When you’re planning on buying a house, even though might be a little bit more tedious upfront, might require a little bit more work upfront.
And this is a perfect example of why, right? If you were getting qualified to buy a house pre-qual, if you will, talking to a lender, they didn’t ask for any documentation. They didn’t really run your credit. They just asked how you thought it was, eh, it’s good, it’s fair, whatever. And you’re putting less than 20% down.
They have to be able to calculate that mortgage insurance. So unless they’re super accurate at guessing your profile, your credit score, you know the type of property, everything about you, chances are that mortgage insurance quote isn’t going to be accurate. So just make sure, again, there’s a lot. Josh just mentioned a wide range over a full percent in the lowest versus the highest. In fact, it was more than that.
That could impact your monthly payment. So it’s super important to make sure you’re having that conversation upfront, right? Just to make sure you have an idea of what your total expenses are gonna be when you’re planning on buying a house. And Josh, this is something I’m sure we’re gonna talk about, just by putting an extra two to 3% down, right?
So conventional has an option of putting 3% down to buy a house. Often cases, when you compare that 3% conventional option to FHA, FHA ends up being the better option just because the mortgage insurance on that 3% down option is so high.
Whereas by putting a little bit more money down on the conventional loan, it may work out that the conventional loan’s better, but more often than not in the calculations and the conversations we’ve had, a lot of times it’s between five and 10% down to make that conventional loan a quote unquote better loan in terms of monthly payment. And a lot of it has to do with that mortgage insurance and the fact that mortgage insurance now is less expensive on FHA, it almost makes FHA a little bit more attractive in that sense.
But FHA has its own guidelines and requirements above and beyond what we’re talking about here today. And in fact, that’s probably something we should talk about in another video, Josh, but let’s talk about VA.
VA is probably the best loan program out there for a number of reasons. But when it comes to mortgage insurance it really is at the top of the list.
[00:14:48] Josh Lewis, Certified Mortgage Consultant: A thousand percent. So there is no monthly mortgage insurance. That’s what people love about it. Since there’s zero down required with a VA loan, how does VA ensure against the risk of a potential [00:15:00] default? They charge what they call their VA funding fee.
It is the exact same thing as that upfront mortgage insurance premium on an FHA loan. You can be exempt from paying that VA funding fee, if you have a service related disability of more than 10%. 10% or greater, you don’t have to pay that.
All other veterans will pay this upfront VA funding fee. And it varies on a number of things, whether it’s the first time you’ve used it or you’re using it again for a second time.
And then also, How much you are putting down. We just talked about super cool that just reduced their monthly mortgage insurance premiums. VA just reduced their funding fees. So after April 7th we’re looking at, it went down from 2.3% to 2.15% for a first time use with no down payment.
So your typical, what do we think of as a VA borrower? They’re not putting down, just got outta the service. They’re buying their first home. That’s 2.15%. Now, if you sell that house and you come back and you wanna buy another one five years from now and you still have zero down, they bump that up. It’s gonna be 3.3%. So that can go down to as low as one and a quarter if you put 10% or more down, or zero if you’re exempt.
But cool thing, you pay it up upfront, you don’t have to pay it outta pocket, it’s financed into the loan. So to borrowers, it’s essentially transparent that they’re not paying anything, but that’s how they cover the risk for VA loans.
[00:16:19] Jeb Smith, Huntington Beach Realtor: No good stuff. Last two programs talk about today before we start getting into some questions about removing it. USDA, how does it set up on USDA.
Different, percentages, but exact, exactly like an FHA loan. So you have an upfront premium of 1% instead of 1.75, so significantly cheaper than an FHA loan. Even though you’re putting zero down.
And then instead of that 0.55 or 0.50 monthly, you’re looking at 0.30 with the USDA loan. So very affordable mortgage insurance for a loan that requires zero down payment.
So we talk about if you’re VA eligible, 99 times out of a hundred, you’re gonna use VA financing cuz it’s the best option for you. If the property you’re buying is USDA eligible and you meet the income limits, probably also going to be the right route for you to go with financing that property.
Awesome. And then lastly, let’s talk about jumbo loans. Buying $2 million house, putting 10% down. Again, this is just throwing out numbers, not saying it’s accurate, but how does mortgage insurance look on something like that?
[00:17:17] Josh Lewis, Certified Mortgage Consultant: Jumbo loans are all over the place. Some lenders, many lenders, I would probably say more than not in the jumbo space, require 20% down. They don’t even do ’em with less than 20% down.
So those that do, they want to insure themselves against risk. They can do it a couple of ways. They can just charge a higher rate and they say, Hey, we’re gonna make more on all of the loans and we’ll eat the losses on the few that go to default.
They can charge more on the loan and take some of that profit and buy mortgage insurance themselves, or they can charge monthly mortgage insurance. The monthly mortgage insurance is not that common on jumbo loans, but it’s also not totally unheard of. So you could see any of those options if you’re putting less than 20% down on a jumbo loan.
[00:17:56] Jeb Smith, Huntington Beach Realtor: Good. So the most common question I get, [00:18:00] Josh, in everything I do relates around mortgage insurance is how do I get rid of it?
When can I refinance out of this property and get rid of the mortgage insurance? If my property’s appreciated? Can I refinance out of an loan into a conventional loan and get rid of the mortgage insurance? If I have mortgage insurance on this loan, at what point can I get rid of it? How much appreciation, how much equity do I need in the property?
So, FHA we’ve talked about to start with, right? The only time that comes off is if you put at least 10% down when you’re buying that property, and then it falls off automatically after year 11. So FHA pretty simple.
But with that said, Josh, if you have an FHA loan, you put less than 20% down so that mortgage insurance is on it for the life of the loan. How would one at that point get rid of mortgage insurance on an FHA loan?
[00:18:51] Josh Lewis, Certified Mortgage Consultant: The only way to ever get rid of it other than the 10% down and falling off automatically 11 years, is for you to refinance out of that loan into another loan program that does not require mortgage insurance. Truly the one and only way.
And Jeb, think about this, from 1982 until about nine, 10 months ago, we were in a 40 year downtrend in interest rates. So this wasn’t that big of an issue because just wait a year or two and you’ll have a refinance opportunity where you can get the same or better interest rate than you currently have.
And if your property’s appreciated, get rid of your mortgage insurance. Right now, I’ve had three borrowers in the last 10 days reach out to me, Hey, I’ve got this loan. How do I get rid of my mortgage insurance?
I look it up. We did an FHA loan for them, and they have a 2.75% interest rate. Or they have a 3.1% interest rate, even with the older 0.85% mortgage insurance added on top of that, the effective rate is well under 4% and any loan program right now we’re above five and a half, 6% best case today.
So there is no way to remove it and improve your situation. No one wants to remove in mortgage insurance just because they’re removing the mortgage insurance. They wanna remove it to make the monthly payment more manageable. And that’s just really not possible with FHA loans right now.
[00:20:05] Jeb Smith, Huntington Beach Realtor: Yeah. And one thing we’re gonna talk about here in a moment when we’re going over some numbers, some real numbers on the program, I should have mentioned this earlier in the video cuz it is super important, is the idea of waiting until you have 20% down so that you can avoid mortgage insurance entirely, versus buying a house with a minimal down payment, FHA, conventional whatever it is, getting into the house, paying mortgage insurance, what that looks like, right?
Because a lot of people ask that question, should I wait until I have the money to put down, or should I just bite the bullet, if you will, and that’s a common phrase used when talking about it. Should I bite the bullet and do it now? So just hang with us here in just a, couple minutes and we’re gonna dive into that in a little bit more detail.
But Josh, when does it automatically fall off if I don’t have the ability to refinance, for example, say I have a super low rate, right? Say, so say I have a conventional loan, now I put 10% and I was lucky enough to get one of those rates [00:21:00] at 3% or under 3%.
And let’s just say my house didn’t appreciate like crazy, which most people that ended up with those rates ended up with appreciation as well, just because of the timing of the market. But let’s say not, let’s say I don’t want to get rid of that rate when am I able to get rid of that mortgage insurance?
[00:21:16] Josh Lewis, Certified Mortgage Consultant: So, It will automatically come off when you hit 78% based off of the original value, your original purchase price. And when the lender goes to take that off, they do have to verify a couple things.
They have to verify you’ve been current on your payments. No 30 day lates in the last 12 months, no 60 day lates in the last 24 months. Then they also have to verify that the property value hasn’t decreased. So we also have another very unlikely situation where before you get to 78%, but once you’ve hit 80%, you can reach out to the servicer and say, Hey, I’m at 80% now and ask them to remove it.
They’re gonna do the same thing. Verify you’ve been on time for the last 12 months, verify the property value hasn’t dropped and you’ve hit 80%. They will get rid of it. So if you’re super on top of it and that tiny little window between those two, you can reach out and request it.
What we get more often, Jeb, is people saying, Hey, Home value’s gone up a bunch. I want to get to my lender and make ’em take this off. We can do it after two years. So they can require that you have it on there for two years to prove that we have that payment history, that you’re making it on time and that something has happened with the home value there.
So at that point, they can do a broker price opinion to prove the value. They have some automated systems that can tell them what the value. If none of that supports what you think the value is, you can generally order an appraisal and hopefully get rid of that. So that if it’s been between two and five years, we have to get it all the way down to 75%.
After five years, they’ll do that at 80%. Now that is for owner occupied one unit properties or second homes. If we’re talking owner-occupied, two to four units or any investment property, it’s gotta be all the way at 70% there. So those are the big things with the conventional loan of when you can get rid of it.
So it’s cool feature it’s one of the big check marks in the favor of conventional. If we’re looking at FHA versus conventional, FHA is generally going to have a lower payment because the lower mortgage insurance plus lower interest rate for most people, lower mortgage insurance and the lower interest rate.
But conventional, the things that it has in its favor is you don’t have the upfront mortgage insurance premium that gets added onto the loan amount, and at some point you can get rid of it.
So we have to weigh all of those things. And if you’re talking to a loan officer and they’re not at least showing you both of them, like a lot of times I’ll show it to a client and they’ll go, that conventional looks terrible for me because my monthly mortgage insurance, 1.1%, and my rate is a half percent higher than an FHA. I would never do that.
Others be like, you know what, that payment’s about $30 more, but my loan amount is $7,000 less. So those are the things that you wanna be looking at when we’re comparing conventional versus FHA and deciding which one is right for you as either a first time buyer or a minimum down buyer.
[00:23:56] Jeb Smith, Huntington Beach Realtor: Got it. So we already discussed VA no mortgage insurance, [00:24:00] so no need to have this conversation. USDA, how does USDA differ from what we’ve discussed so far?
[00:24:05] Josh Lewis, Certified Mortgage Consultant: It doesn’t. Same as FHA. You’re gonna have that for the life of the loan.
[00:24:08] Jeb Smith, Huntington Beach Realtor: All right, so now let’s talk about some actual numbers. Minimum down what’s needed, what payments look like, what mortgage insurance looks like.
But before we dive into that, Josh let’s have the conversation here quickly about the idea of waiting to buy until you have 20% down versus buying now. And let’s start with an example.
An example would be, and this is a real life example of a client who purchased a home during, I don’t know what year it was, Josh, you could probably jump in there and give the year, but during 2020, 2021.
Got an FHA loan, was fortunate enough to see the property value increase within, I think a six, seven month time period to the point where they could then refinance out of that FHA loan into a conventional loan and have no mortgage insurance at all.
And the reason I start with that, the example is because had they not just ponied up, bought the house and waited until they got the 20%, they would’ve never been in a position for one to buy that house, right? They still would be saving.
Secondly, they would’ve never reaped the rewards of the appreciation and in turn ended up with a lower monthly payment than they ultimately started with because of everything that happened.
Now, I realize probably a once in a lifetime opportunity with how quickly things change. But the moral here is more or less the same, and that’s the idea of getting in the game versus sitting on the sidelines. So Josh, what are your thoughts on it?
[00:25:33] Josh Lewis, Certified Mortgage Consultant: What I wanna look at, so that for a lot of people around the country who may be listening, it was like a $710,000 purchase and it went up to $800,000 within seven or eight months.
So legitimately that’s best case scenario in terms of how quickly you can refinance. Rates cooperated or even lower. So best case scenario, but let’s look and try and draw some parallels to someone in the current market. Say you’re looking at a $500,000 home and you only have 5% to put down. 5% down is a good down payment.
You saved up $25,000 plus some closing costs. Now, if you say, no way, I hate the idea of mortgage insurance. I’m not doing it. I’m gonna wait until I have 20% down, so we got another 15%. We need to save another $75,000. Let’s say you were a really aggressive saver and you could save $3,000 a month. I mean that’s an aggressive number.
I don’t know many people that can save $3,000 a month, but if you could, we’re talking 25 months. A little more than two years. Now, historically, homes over the last 70, 80 years have gone up nearly 5% a year, 4.7, 4.8. Somewhere in that number. You and I have talked, Jeb, we think after a few years of above trend growth, I think it’s pretty reasonable we can expect a few years of below trend growth going forward.
But let’s say in that situation that homes go up, 2% a year while that person is saving up that money. We’ve gone up about 5% in total over those two years. That 500,000 home is now $525k, so they still don’t quite have 20% down and they didn’t get to benefit from that $25,000 of [00:27:00] appreciation.
and they didn’t get to benefit from the principal reduction of, at current interest rates, you get at least three, four, or $500 going towards principal. Over 24 months we got maybe another $10,000 there. So this is not an advertisement if you’re listening at home to say, Hey, everyone should go out today and buy a house. For that person who thinks that it’s gonna be more financially advantageous to put this off and save aggressively.
I would question that I would wanna look uh, make a reasonable projection of what you think appreciation’s gonna look like. A reasonable projection of what you can save and see how far down the line you’re going to be and what you’re likely to miss out on. Principle reduction and potential appreciation in the interim.
People think you know really negative thoughts about mortgage insurance. It’s a very positive thing. It allows you to get into a home without having to take up all the time to save a 20% down payment.
[00:27:50] Jeb Smith, Huntington Beach Realtor: It’s the price of doing business. It fair to say a and I wanna stress what Josh said. This is not a push to get you to go out and buy a house.
It’s about being the right time in your life. It’s about being comfortable with the payment now, right? Not comfortable once the property goes up and the mortgage insurance falls off. Comfortable with the payment now. Having some money in the bank. Having a longer term time horizon.
The example we gave was a bad example in the case that happened in six months. It might take you five years. It might take you seven, eight years. 10 years depending on where you live in the country, to get that additional appreciation in that property where the mortgage insurance falls off. So again, we gave you an example to use for the show that helped us, show what we’re trying to show here, but understand it’s different for each person.
Buy when it’s the right time in your life, because that’s ultimately what you should be shooting for. And if that requires you waiting a little bit longer, saving a little bit more money so you’re comfortable with the payment, so be it. It is what it is.
So Josh, let’s give some real examples on what a minimum down looks like for a median purchase price at the moment, $467,700, that was the Q4 of 2022 number. Since then it’s come down, trended down a little bit.
But when we’re talking these numbers, Josh, What are we talking with regards to credit scores? Are we talking multiple borrowers on this? Because all of that stuff is gonna play a part and I want to give accurate information.
[00:29:11] Josh Lewis, Certified Mortgage Consultant: Yep. So let’s start with the easy one.
We talked about FHA doesn’t have all those variables impacting what your mortgage insurance looks like. So if you put three and a half percent down, it’s a 451 and change loan amount. That upfront mortgage insurance premium of one and three quarters percent amounts to almost $8,000, $7,898. So despite the fact that you’re putting 3.5% down, you end up with a $459,229 loan amount.
Now at that current reduced 0.55% mortgage insurance rate, it’s $210 a month. For that $500,000 minimum down FHA purchase, $210 a month. You also paid that $8,000 up front. So we can’t ignore it. You’re gonna ignore it when you’re writing your check every month cuz it’s there subsidizing the lower monthly payment, but it is a real number. You have less home equity.
So let’s roll through a conventional 3% down. That’s really the big [00:30:00] alternative to an FHA purchase. And when we look at that, 3% down gives us $453,669. Now I wanna give you a couple of different examples to show you how widely these rates can vary on the mortgage insurance for two somewhat similar borrowers.
If we have two borrowers, husband and wife, 740 credit score, buying a single family residence, they have a reasonable debt to income ratio under 40%. It’s gonna be 0.47% a month. That’s only $177.69, so it’s cheaper than the FHA mortgage insurance. And they didn’t have that upfront premium, but let’s remember, half a percent less.
So let’s remember though something here that kind of goes against a conventional, it’s generally about the half percent higher interest rate. So we have 0.55 on the mi for the other, we have 0.47 on this, but once you factor in the higher interest rate, it’s about 0.97. So we’re still a little bit higher.
You’re gonna a slightly higher monthly payment, but like you said, you put lower down payment and you have more equity in your property despite putting less down. So for a lot of people, they look at that and go, I like that 3% down conventional, much better.
Now let’s look at the same scenario, but we have a single borrower. He comes through, he’s been living the single life. Doesn’t have bad credit, but he doesn’t have the great 750, 760, 780 credit score. We had a 680 single borrower, same debt to income under 40%. That jumps to 1.35%. going from a 740 credit score to a 680 credit score, two borrowers to one borrower.
Those are really the only variables we changed. That’s $510 and 38 cents a month. Wow. For that borrower, Jeb there’s never a question. This, that borrower’s going FHA. It’s just, it’s a monster difference between the two payments.
[00:31:38] Jeb Smith, Huntington Beach Realtor: And then you didn’t even factor in the higher rate. You’re just talking mortgage insurance there.
So if it’s another half percent, like the first one is you’re talking 1.85%, and so the difference is gonna be astronomical.
[00:31:50] Josh Lewis, Certified Mortgage Consultant: Absolutely. And Jeb, we didn’t even factor in the recent loan level price adjustment increases. That 680 score has always been punished on a conventional loan, whereas it’s considered close to, if not the best tier of credit for FHA loans.
So borrowers that are good borrowers, good credit. 680, 695, 715 credit scores. Most of those people are going to be looking at going FHA versus conventional because that monthly payment is gonna be so much more manageable.
Now I wanted to do the same example but with 5% down. So same sets of borrowers. We’re gonna do the same couple and the same single borrower, same credit scores, but just to show you how much putting the additional 2% down will reduce it.
So we get a loan of $444,315 with 5% down, it drops from 0.47 a month to 0.30, which drops it from $177 to $111 a month.
$111. I mean, Look at that versus what if I put save for two, three years to get that additional 15%? I saved that $111. I have more than that going to principal every month. So this is why for well-qualified borrowers I want them to run the numbers and see what the mortgage insurance rate is and what that monthly cost is [00:33:00] before they say, no, I wanna save more cause I don’t want to have mortgage insurance.
Most people have no idea what that number looks like. Now let’s go back to our single guy with the 680 credit score. His drops from 1.35 down to 1.03. Still likely in that situation, I’d say go FHA and save the extra one and a half percent.
Go FHA, take that extra one and a half percent pay the upfront mortgage insurance premium out of pocket versus financing it. Any way you cut it, we’ve got number of ways to make that make sense. But what we’re seeing here, the more you put down for the most well-qualified borrowers, a 10% down with two borrowers and 750, 760 credit scores, it’s gonna be 0.2, 0.25% mortgage insurance.
You put 15% down, it’s getting down close to 0.10 where it’s almost a non-issue. Now granted, you’re putting more down. You have to be well qualified. Now, when we talk about the people that are impacted by high mortgage insurance rates may wanna look at FHA or may wanna look at coming up with some more money to put down, it’s anyone, once you get below a 700 credit score, conventional mortgage insurance and now their rates with the changes at the loan level price adjustments start getting expensive now.
[00:34:07] Jeb Smith, Huntington Beach Realtor: And for anybody listening to this wondering, what the hell are these guys talking about? All of these numbers, I’ll actually take these examples and I’ll put ’em in the show notes here so you can actually grab ’em and see exactly what we were talking about with regards to credit scores and how that impacted the mortgage insurance and what have you.
Now, if you’re listening to this and want to get more detailed on it, talk to a lender. That’s what we always recommend. Talk to a mortgage professional. There’s a link in the description of this as well that will get you in touch with somebody that can guide you through that process. That’s ultimately where you want to end up if you’re considering buying a home regardless.
But Josh, we mentioned VA. Again, no mortgage insurance. So it’s really simple to calculate that. But lastly, let’s end on USDA, cuz there are some people out there considering USDA loans.
[00:34:49] Josh Lewis, Certified Mortgage Consultant: The USDA again is awesome. Instead of adding, $7,800, $7,900 to your loan amount, you add 1%, $4677 onto that loan amount, and then your monthly mortgage insurance is only $137.
So USDA is awesome, VA is awesome. If you qualify and your property is eligible for either of those options, pursue them. But when we get back to this question of FHA versus conventional, you have to weigh all of these things out. How strong are my qualifications? Am I comfortable with the upfront premium?
How long do I think I’m gonna be here? Do I think it’s important that I can remove this mortgage insurance at some point? With rates at, 40 year highs right now, Jeb shouldn’t say 40 year highs. 30 year highs. Really, we’re gonna get a window of opportunity for most of these people to refinance.
So if in five years property values are higher, there’s probably gonna be a window to refinance out of them. But there’s no guarantee of that. So the question just becomes, how important do you think it is for you to have the ability to remove your mortgage insurance later? Because for most borrowers, other than those that are absolutely super, super well qualified, The FHA loan is going to have the lowest monthly payment for you.
[00:35:57] Jeb Smith, Huntington Beach Realtor: No. So hopefully you guys got some valuable information [00:36:00] out of this. If you’re new, this is the first episode you’re listening to. We’ve done detailed episodes like this on things like the loan estimate, things like the down payment, just to give a Bird’s eye view of how all of this works. So be sure to go and check those out.
If you’re new to us listening to this episode, there’s something we didn’t address you wanna address, you can always reach out. And on top of that, if there’s something you want us to cover when it comes to buying a house that you want more detailed information on, we would love the opportunity to hear that from you as well, because that’s what makes great shows is giving you guys the information that you want to hear so that you can make educated decisions when going through that process. So again, we appreciate all the the support you guys give us. All the likes, the thumbs ups, the kind remarks that you leave us. Keep doing it. And we’ll keep delivering. So until next time, Adios!
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