PSA: there are now scenarios (incl. for current homeowners buying the next one) where <20% down is a better rate than 20% down

As if mortgages and getting a good deal on them wasn't convoluted enough already. 🙂

Did you know that PMI is priced out as an interest rate too? Consumers often view it as "PMI = yes/no" but it actually varies drastically by scenario. Your effective interest rate is approximately [ PMI rate + note rate ]. PMI is generally expressed to consumers as a dollar amount to obfuscate this fact. There are also a dozen or so big-name PMI companies, and PMI for any given scenario can in fact be shopped by MLOs for a better PMI rate (excluding some banks and credit unions that may be locked into only one provider), but consumers do not know this and so are not sensitive to it because they are thinking "PMI = yes/no" and not "ok, but what's the PMI rate?" Now that we're all caught up…

Fannie Mae HomeReady started as a first time homebuyer thing, but it's kind of morphed over time.

Info overload time: Intro commercial for context, Screenshot one (you can now own other real estate), screenshot two (risk-based interest rate bumps… waived), and Fannie Mae LLPAs (list of risk-based interest rate bumps). Note the date in screenshot one, and on the LLPA one that is actually a list of discount point bumps to hold constant the rate, not rate bumps directly.

Slowing down…

There will of course be PMI if you put <20% down. Reading between the lines, my interpretation is that there are circumstances Fannie Mae would rather have the insurance policy (recall what PMI stands for) than your 20% down, and so they will incentivize you to do just that.

PMI at 95% LTV with a 640 FICO might be 2.15% (FHA often makes sense for these folks because it is 0.85% regardless of FICO), but at 85%-80.01% LTV with a 760 FICO it might be at 0.19%. If you have a 719 FICO @ 85% LTV, it might come in at .27%.

If your LLPAs (from the link above) add up to more than about 1.5% to discount points (example scenario: 715 FICO + Condo), that might translate to about 0.375% to rate, which is a larger bump than 0.27% to PMI, which might actually make 85% LTV a better deal than 80% LTV. Especially when you consider that the .27% to PMI drops off at some point, but a 30 year fixed rate that's 0.375% higher is… just that, it's fixed at .375% higher for the life of the loan. FICO scores of 680 to 719 are the band where this is most likely applicable, at first cut, but I think anything FICO>680 it is worth running the numbers on.

For people doing the "Nomad Strategy" (an SFR every 12 months, converting the old one into a rental), 95% LTV is now more appealing due to being able to use the HomeReady framework, which has cheaper PMI across the board (even for lenders captive to one PMI company) for LTVs over 90%. HomeReady has also recently become available for High Balance loans, so loans up to $636k in higher cost of living areas. $636k / 0.85% = $748k purchase price.

Just to make this even more complicated, it's not possible to know if HomeReady will even be available for your particular scenario until the lender has a) all your paperwork and b) a specific property identified. Limitations are in place by specific census tract. Not zip code, county, or city, but census tract. There might be 30 census tracts in a city, and your real estate agent will likely shoot you if you try to house-hunt by "only in these 14 census tracts spread out all over the city like a checkerboard."

More real estate tips at Program Realty Wix site


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