Mortgages, PMI & Sub-prime loans

If you are on the market for buying a home and don’t have 20% down payment, eJabs has a great post on PMI writeoff.

We just went through the whole home buying process last month and I should share some of our experiences while the facts are fresh in my mind.

FHA Loans

If you have less than perfect credit and don’t have the 20% down payment, you might still be able to buy a home with FHA loans. This excerpt pretty much summarizes the advantage of FHA Loan over a conventional loan.

Insurance on FHA mortgages are often rolled into the total monthly payment at 0.5 percent of the total loan amount which is roughly half of the price of mortgage insurance on a conventional loan. After five years or when the loan balance reaches 78 percent, the additional mortgage insurance is typically met and therefore drops off the total monthly payment.


  • Easy to qualify even with not so perfect credit
  • Get a loan with just 3% down payment
  • Fixed interest rate for the rest of the 97% loan instead of the usual exorbitant rate for the piggyback loan
  • You pay 0.5% of the loan as a monthly PMI as opposed to the usual 1%

Caveats: (not really cons)

  • Your maximum loan amount can’t be more than 200K which probably is in the range for most people with credit problems.
  • You pay an one-time FHA loan fee of 1.5% of the loan amount but it can be rolled into the loan.

Lately, I have been hearing that the sub-prime loans (loans offered to people with low down payments and/or bad credit) isn’t doing good lately. Lot of the lenders that offered them are retracting back on it. What does this mean to us? Read this great post from
Subprime Mortgage Lenders Getting Hammered: What Does This Mean For Housing Prices?

More to read on this topic:

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4 Responses to “Mortgages, PMI & Sub-prime loans”

  1. Matthew Jabs March 22, 2007 at 5:13 pm #

    Excellent post Karthik.

    Thanks for more info on this subject as I’m going throu the process right now. I’m trying to secure the best option for me at the lowest cost and rate.

  2. K-IntheHouse March 22, 2007 at 6:02 pm #

    I just read your email where you asked me about it! I guess this answers that. Let me know if you have any specific questions on it. Will be glad to help you out..

  3. Chris April 9, 2008 at 1:00 am #

    K, Good post on explaining an FHA loan. You did miss one point though, every FHA loan also has Upfront Mortgage Insurance Premium (UFMIP) equal to 1.5% of the loan amount that is added to the loan amount. The UFMIP is paid at closing to FHA. Most FHA borrowers then finance the UFMIP over the life of the loan. So, the loan amount is actually 1.5% larger and your payment is calculated off that amount.

  4. kevin@Paydayloans July 19, 2008 at 5:32 pm #

    I am suprised how easy it was for so many people to get a loan without any ID or proff of income. The sub prime mess was the banks own fault they sold mortages and took comissions. Now they want everyone else to pay for the losses. If FHA gave PMI insurance on those loans how did they not look over the applications ans see the problems in the first place.

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