According to the latest Ellie Mae Millennial tracker, conventional loans have become a significantly more popular home loan choice for Millennial homebuyers. More specifically, 63 percent of all loans approved for Millennials have been conventional loans, while only 32 percent were recorded as FHA loans.
“Conventional loans are rising, from 60 percent in March to June’s 63 percent, indicating that—at least at the moment—Millennials are slightly more able to afford a house without government guarantees,” reported Joe Tyrrell, Executive Vice President of Corporate Strategy at Ellie Mae. “Alternatively, this also demonstrates a potential opportunity for greater borrower education on FHA and other loan options available.”
So why are conventional home loans becoming so popular with Millennial homebuyers? Here are three common reasons:
- More lenient student loan guidelines: One of the main reasons is Fannie Mae’s new underwriting rules. The three altered policies include permitting debt to be paid by others, new student debt calculations, and a student loan cash-out refinance expansion. For additional details on these new policies, see here. In contrast, mortgage lenders of FHA-backed loans generally follow stricter student loan guidelines. For example, when calculating the borrower’s debt-to-income ratio (DTI), the lender must include either a projected student loan payment or 2 percent of the borrower’s deferred student loan debt.
- Automatic cancellation of mortgage insurance: With conventional private mortgage insurance (PMI), monthly payments will be automatically cancelled when the borrower reaches 78 percent loan-to-value (LTV). With an FHA mortgage insurance premium (MIP), borrowers hoping to get rid of or lower their monthly insurance payments typically have to refinance in order to do so.
- Mortgage insurance is credit sensitive and does not require upfront fees: Conventional mortgage insurance rates depend on the borrower’s credit score. This means higher credit scores will result in lower insurance rates. Payments for conventional mortgage insurance are offered monthly or as a single premium. FHA mortgage insurance has a one-size-fits-all structure. In other words, you will be required to pay the same premium regardless of a great credit score. With this type of mortgage insurance, borrowers also face upfront and monthly charges.
Although conventional home loans have recently become the more popular loan selection for Millennials, it doesn’t necessarily mean that a conventional loan is the right option for you. To ensure that your loan is best for your financial situation, consult with a lender. For more information about conventional home loans, or to learn more about home financing, contact one of our mortgage specialists or download The Ultimate Guide to Homebuying and Financing.