3% Down Conventional Mortgages do exist... but are they worth it?

EDIT:  Fannie Mae and Freddie Mac have discontinued this program as of November 2013.   There is now a 5% down payment required.  This article has been archived. 

3% Down Conventional Mortgages do exist... 

...but are they worth it?

The answer to the question depends on the circumstance of the borrowers.  

Conventional mortgages have Loan Level Pricing Adjustments.  Loan Level Pricing Adjustments (LLPAs) are pricing adjustments that Fannie Mae and Freddie Mac make to Conventional mortgages based on equity or Loan to Value (LTV) and credit score. The lower the credit score and available equity, the higher this adjustment will be. Unless the borrower wishes to pay for these adjustments directly, the end result is a higher available interest rate to offset these adjustments.

This is why credit scores are so much more crucial to Conventional financing than some of the Government programs like FHA, VA and USDA. Sure, credit score matters with the Government programs when it come to qualifying but it does not have nearly the same effect on the ultimate interest rate. A borrower seeking a Government mortgage with a 640 credit score may end up with a interest rate only about .25% higher than a borrower with a 740 credit score. A borrower seeking a Conventional mortgage with a 640 credit score may end up with an interest rate at least 1% higher than a borrower with a 740 credit score.

When it comes to 97% Conventional Mortgages, the Loan to Value (LTV) is already maxed out, so to keep the interest rate competitive a high credit score is crucial. Remember, as credit scores go down these adjustments go up. So at some point, there is a threshold where the 97% Conventional Mortgage becomes too expensive (due to adjustments) to compete with other financing options.

Looking at the pricing chart below, we can see that for borrowers with a credit score of at least 740, the 97% Conventional Mortgage program is cheaper than the FHA Mortgage program... 

*** Property taxes and homeowners insurance will be required to be included with the payment for all Conventional mortgages with less than 20% down and all FHA Mortgages.  These figures vary by property.   The above assumptions were based on a loan amount of $200,000 on a 30 year fixed.   It is not an offer for financing but just a generalization to make a comparison.  For specifics, call me for a quote.

For more information about Conventional Mortgages or FHA Mortgages in Pennsylvania, feel free to contact me.