Previously, if a home buyer was looking for a minimal down payment, an 3.5% down payment FHA loan was most likely the best option - unless he/she meets income limits and is buying in an eligible USDA area or he/she is a qualified veteran or active duty military.
Fannie Mae and Freddie Mac - the two agencies responsible for establishing conventional loan guidelines - have introduced conventional mortgage loans with a 3% down payment. The new 3% down payment loan provides a potentially less expensive alternative to an FHA loan.
As with any conventional mortgage loan with less than a 20% down payment, private mortgage insurance (PMI) is required. The additional risk associated with the smaller down payment requires a higher PMI premium than conventional mortgage loans with 5% or larger down payments.
To remain competitive, effective January 26, 2015, FHA has reduced their annual mortgage insurance premium (MIP), which is paid monthly as part of your FHA payment, to 0.85% for most 30 year fixed, 3.5% down payment loans.
This new 3% down payment conventional loan has made borrowing less expensive for homebuyers in the market for a low down payment mortgage loan.
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