The Future of 97% Mortgage Loans – BAM!

Anyone who lived in southwestern Ohio during the 80s and 90s probably remembers 97X. It was a great alternative radio station out of Oxford, Ohio. The station was well known nationally as “97X: Bam – the future of Rock n Roll!” It was quoted by Dustin Hoffman’s character Raymond Babbitt in the movie Rain Man. And one of the current anchors on Fox News Channel, Bill Hemmer, was once a DJ there. But like many other things from small towns, it has gone by the wayside.

It now appears that another great 97 is headed for the trash bin. The Wall Street Journal is reporting that Fannie Mae is in discussions to stop purchasing mortgages that require a minimum down payment of 3%. Despite the housing bust, Fannie never stopped purchasing these loans. They did charge a higher interest rate due to the increased risk.

However, many lenders stopped offering these loans because they could not find a mortgage insurance company to provide adequate coverage. But with the seeming return to strength of the PMI companies, more are offering and pushing 97% loans as a cheaper alternative to FHA lending.

And they are right. For a borrower with a 3% down payment, a strong credit score (read 720+) and a reasonable debt-to-income ratio, the member would most likely get a better financial deal with a conventional loan. The reason? Recent changes by HUD have increased the upfront and monthly insurance premiums. Whereas 97% conventional loans usually just have a monthly insurance premium. And the FHA premium stays with the loan for its entire life, whereas conventional loans have PMI fall off according to pre-determined schedules.

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