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Why FHA Doesn’t Work for All Low Downpayment Buyers

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Building Homeownership Commentary by Brien McMahon

RISMEDIA, November 24, 2010—During my years at PHH Mortgage and Realogy, I had the privilege to help build some of the most trusted brands in real estate, including Coldwell Banker, Century 21, ERA, Better Homes and Gardens, and Sotheby’s International Realty. My goal was always simple—to align national franchises with the best brokers and agents who understood the value of customer relationships.

During that time, I never gave private mortgage insurance or private MI much thought. When I did, I viewed it as many of you probably do—a necessary monthly payment required on conventional, low downpayment loans. But as the chief franchise officer for private mortgage insurer Radian Guaranty Inc., I have the opportunity to view private MI from a different perspective.

Now the phrase, “If I knew then what I know now,” comes to mind. If during my days with Realogy, I could have shared that the flexible payment options of private MI can help low downpayment, creditworthy buyers lower their monthly payments or increase their purchasing power without increasing monthly payments, I could have given the agents in our franchises a tremendous competitive advantage.

Today, the majority of buyers without a 20% downpayment are getting FHA loans. For some of those buyers, FHA was the way to go, but for those buyers with FICO scores of 720 or higher and 5% to 15% to put down, there is little doubt they overpaid for their insurance and had their purchasing power significantly reduced. This is even truer with the FHA’s new pricing structure.

I realize asking buyers to come up with 5% for a downpayment rather than the FHA’s 3.5% can seem too much to ask, but when they learn a conventional loan with private MI can increase their purchasing power by 15% or save them 11% on their monthly payment (based on a $250,000 loan), it can make all the difference in putting their dream home within reach.

Consider the flexibility private MI can provide both buyers and sellers when negotiating sales price: lower private MI rates mean the buyer may now be able to afford a home they previously thought was out of their price range, and a seller may be able to accept a slightly lower offer to close the deal, since they can affordably put less than 20% down on their next home.

I’m sharing this with you, not only because I’m part of the Radian team, but because I’ve been in your role and I know this knowledge can truly benefit you as well.

If you solely follow the market’s FHA trend, you are missing out on options that could help you find more leads and sell more homes. By simply asking your mortgage loan professional (or having your buyer ask) if a conventional loan with private MI could make sense, you could better serve your buyer and make the sale.

Brien McMahon is chief franchise officer of Radian Guaranty Inc. More information may be found at www.radian.biz.

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