This series began by looking at the differences in Conventional loans versus FHA loans regarding interest rates, then mortgage insurance, and in the last post, how mortgage insurance is determined (appraisal value versus purchase price). Part four of the series will look into down payments and assistance for making down payments in both programs.
The purchase scenario is based on a $200,000 purchase price. The borrower will put a 3% down payment on the home. The rate for both loans will be 5.75%. Let’s begin with conventional loans.
If the borrower does not have at least a 3% down payment, the down payment can come in the form of a gift from a family member. For a $200,000 home, the down payment and/or gift amount would be $6,000. The loan amount would be $194,000.
FHA guidelines allow a borrower to use funds for a down payment by a gift from a relative, from a government grant, or a donation from a nonprofit organization. The borrower does not have to pay back the down payment, but there are differences between those options. Receiving a donation through a nonprofit organization can be a bit different. A typical scenario looks something like this:
– A borrower is interested in buying a home, but does not have the funds for the down payment
– The seller gives a donation in the amount of 4% of the purchase price to a nonprofit organization. To compensate the seller, the purchase price of the home is typically increased by 4%.
– The nonprofit organization will then give a donation in the amount of 3% of the purchase price to the borrower
– To be clear, this is not required, but is a typical scenario.
On a home with an asking price of $200,000, the agreed purchase price would actually be increased to $208,000. The seller then “donates” $8,000 to a nonprofit organization, and roughly $6,000 goes to the borrower for the down payment. That makes the loan amount $202,000, but wait, there’s more.
Don’t forget to factor in the 1.5% upfront MIP fee for mortgage insurance on an FHA loan (see the second part of this series for more information). The loan amount is now just a shade over $205,000.
An interesting question is now raised. How long will it take to get the FHA loan amount down to $194,000 – the original loan amount of the conventional loan under this scenario? Using a rate of 5.75%, it will take 46 payments (almost four years) to pay down the FHA loan balance to $194,000. For the life of the loan, this borrower would pay over $23,000 more for the FHA loan than the conventional loan.
Using a down payment assistance non-profit organization for the down payment, our borrower was able to get the $6,000 needed for the 3% down payment. However, at the end of the loan term, the borrower would have paid almost four times that amount through additional principle and interest! If it is possible to put at least 3% down yourself or get the needed funds through a gift from a relative, it would save you thousands of dollars to use a conventional loan instead of an FHA down payment assistance program loan.
As I said before, there are legitimate FHA down payment assistance programs out there. However, be careful which ones you choose to use because some of them are not what they claim to be!
Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.
