FHA stigma vs. 'conventional' cost

Q: I'm trying to buy my first home using a loan insured by the Federal Housing Administration (FHA). My offers keep getting rejected, and my agent says it's because sellers don't like FHA loans because of all the different repairs and guidelines. I understand that. But I'm looking for a clear answer as to how much of a downpayment I would need to come up with to qualify for a non-FHA loan. Can you clear this up?

A: In my experience, usually when things in real estate are unclear it's because the teacher and the student aren't on the same page, aren't using the same vocabulary word or just don't get each other. Your question poses one of the really kind of complicated things about the current market. I'll break it down, but don't fault your advisers for giving you an unclear answer. It is a tough thing to understand.

Need-to-Knows

Anytime you put less than 20 percent down on a home loan, private mortgage insurance (PMI) must be acquired to insure the lender against the risk that you will default.

PMI fell into disuse during the subprime mortgage era, mostly because there were so many second and third mortgage loans available standing in for the 20 percent downpayment (or some lesser amount, for buyers who wanted to put some money down). This is how we got those 80-10-10 or 80-20 loan combinations that facilitated 100 percent financing.

When the foreclosure crisis hit, virtually all of the second and third lenders that had helped finance these zero-down purchases were unable to recover any of the funds they had lent, because the value of the homes securing the loan had fallen so low that the foreclosure sale recouped only enough to pay the first lender (and sometimes not even pay them all the way off).

The upshot? Lenders are not making those second and third mortgages anymore.

There are conventional (non-FHA) loans for 80 percent, which require a 20 percent downpayment. And there are conventional loans that will do 90 percent of the purchase price, which would require a 10 percent downpayment.

But here's the rub. If you make only a 10 percent downpayment, you will need PMI. And here's the other rub. You also have to qualify for PMI. These insurers have their own credit guidelines, and currently the minimum FICO for non-FHA PMI is 700. FHA-loan PMI does not have a minimum credit score requirement. ...CONTINUED

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