20% down payment a better deal than 3.5% down?

A common misconception amongst first-time homebuyers is that you must have that 20% down payment to even consider buying a house.  It's a part of the popular imagination, the young couple saving and borrowing a good chunk of money before they even begin looking for their first home, and perhaps borrowing the rest from from mom and dad.  Well, times have changed.  In my two years as an agent, I've sold 15 homes, and not one of the buyers of those homes has used a conventional loan - the only type of loan that requires a 20% downpayment.  In fact, I have seen only one offer come in with conventional loan financing. 

The reason the conventional loan is mostly used by investors these days? FHA loans, which used to require 3% down, still require only 3.5% down.  And for active duty and separated military members, spouses, and widows, the VA loan offers even more savings - 0, yes ZERO down.  FHA & VA loans are great for the first-time homebuyer as well as anyone wanting to purchase without dipping into (or accumulating) a hefty nest egg.  This way, any money that you have saved can still be set aside for a rainy day or used for repairs, maintenance, and upkeep of your home.

I was working on a net sheet for a buyer and was just surfing the web for the date the Mortgage Insurance Premium (MIP) went up from 1.75% to 2.25% on FHA loans.  This amount, $5,625 on a $250,000 house, can be financed into the loan. I came across an article on bankrate.com that explores the idea that "home mortgage borrowers with good credit and the funds for a larger down payment may be better served by a conventional loan than an FHA-insured loan," basically because conventional loans do not require the mortgage insurance that an FHA loan does. *While VA loans do not require private mortgage insurance, there is a corresponding fee, which can also be paid up front *or* financed: the VA funding fee, 2.15% of the loan amount for 1st time users.  I summarized some of the article's key points below.
Benefits of an FHA loan:

• great for borrowers with less than stellar credit (most mortgage companies are looking for a 620)
• great for borrowers who want or need to put less than 20% down
• great for borrowers with higher debt-to-income ratios
• borrowers can petition to have their mortgage insurance eliminated after a five-year history of on-time payments

Benefits of a conventional loan:

• borrower can avoid paying the upfront mortgage insurance and possibly the monthly mortgage insurance
• borrowers can petition to have their mortgage insurance eliminated after two years of on-time payments
• *not mentioned in article: borrowers have less limitations on what type of property they buy - a fixer-upper or condo with a high investor ratio may require "Cash Only," or conventional funding. 

Check the article out here.