The Smooth Loan Process #2010-11

5% Down Conventional - Don't Bother!

Over the past couple of days, I have been asked quite a bit if we'll ever see 95% financing on conventional loans again in Arizona. There are two answers to this question. First, it never went away. Second, who cares? It's no good anyway.

Let's take our time machine back to April of 2008. This is when conventional financing really began to make big changes. The changes were not so much with Fannie and Freddie on the loan end of things. The changes were with the Mortgage Insurance (MI) companies. We don't talk about MI too often, but the MI companies were also very hard hit by the real estate market. Every loan with MI that goes to foreclosure means that the MI company pays a claim to the bank that foreclosed. That claim can be as much as 40% of the loan amount.

So with all the foreclosures, the MI companies tightened their guidelines and raised their rates to reduce their exposure in the market. One of those tighter guidelines was maximum financing of 90% in the Foreclosure Axis of Evil. Also known as Arizona, California, Florida and Nevada. In all of this, there is one rogue MI company that has continued to do business in the Axis of Evil at 95% for certain "preferred" lenders (ourselves included). Recently, the preferred lender list was expanded a bit.

If 95% conventional financing has always been available, then why aren't we doing it? Well, it doesn't make sense. By raising their rates, the MI companies have pretty much made sure that we wont use them. If you compare the monthly payment for a conventional loan with 5% down to an FHA loan at the same rate with 3.5% down, the FHA loan will have a lower payment. The mortgage insurance on a 95% conventional is almost double of what FHA currently charges. So with less money out of pocket and a lower payment, FHA is typically my recommendation.

The one and only scenario that the 95% conventional makes sense would be if your purchase price exceeds the maximum FHA loan limit for your County, but less than the conforming loan limit of $417,000.

The Smooth Loan Process Lesson for today: If your down payment is less than 10% of the purchase price, do your loan FHA.

Harold Perkins
Galaxy Lending Group, LLC
602-595-1233
Harold@HaroldPerkins.com