FHA loans are not the next subprime loans. Don't let anyone else fool you on this. FHA has been around since 1934 and subprime mortgages started to emerge in 1994. Subprime loans in many cases were good for those lenders that weren't FHA approved. The problem with that is the rates on subprime mortgages were typically 2% higher than FHA mortgages.
Lastly, just because someone said that they can qualify you for a conventional loan and that it would be cheaper than a FHA mortgage, might not always be correct. In many cases, FHA loans are now cheaper than conventional loans, which I will show you below.
One main reason why a loan officer might still make it sound like conventional loans are cheaper than FHA loans is because they aren't FHA approved. Another reason would be because they don't know much about FHA mortgages.
The example below is based on a $300,000 purchase price with 10% down. One reason why conventional rates are a little higher in this scenario as in FHA rates is because Fannie Mae and Freddie Mac have added penalties per se. If you are putting down less than 30% and your credit score is less than 680, certain fee penalties would apply to you, which would increase your rate. The FICO (credit score) that I am going to use is 640, which is above average credit and will still show in this example that FHA loans are cheaper, even with 10% down.
***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. It all comes down to the investor. We don't have penalties on any credit score above 580. And we can do credit scores down to 550. Many lenders can't go below 580.***
|
Type of Mortgage |
Conventional Loan |
FHA Loan |
|
Purchase Price |
$300,000 |
$300,000 |
|
Mortgage amount w/10% down |
$270,000 |
$274,500 |
|
Mortgage Rate with Zero Points |
7.00% |
6.00% |
|
Principal & Interest Payment |
$1,796.32 |
$1,645.77 |
|
Mortgage Insurance Payment |
$117.00 |
$112.00 |
|
Total Mortgage Payment PI & TI |
$1,913.32 |
$1,757.88 |
|
Savings |
|
$155.44 per month |
Disclaimer : These rates are just an example and can change because of various market conditions and are based on a 30 year fixed rate as of today. The fees would be the same and with zero points, so as to compare this scenario apples to apples. The conventional rate also includes the penalty for the 640 credit score.
Some of you might be saying that you will be adding $4,500 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. This is correct and I don't want to confuse you with more numbers and charts. But here is a quick breakdown. If you kept your house for 5 years, which most people sell in a 6 year period, you would have saved $9,326.40 in payments in 5 years. This is a difference of $4,826.40 that you have saved!!! And one other thing that is very small, but still makes a difference. You will be subtracting a few more dollars per month from your principal because your interest is lower. Just something else to remember.
How do I find an FHA approved lender? You want to make sure who you are dealing with is FHA approved.
Why do I say this? Not all lenders are approved FHA and some may tell you that you don't qualify FHA because in reality, they aren't FHA approved.
You can find a HUD approved lender in your area by going to the following HUD website: http://www.hud.gov/ll/code/llplcrit.html
DISCLOSURE (just be careful of the spelling of the lender. If I put in my company's full name, Infinity Home Mortgage Company, Inc, it tells me that there is no such company. If I put in Infinity Home Mortgage, it shows my company as being FHA approved. Just keep this in mind. You can always call HUD also. (202) 708-1112
____________________________________________________________________________________
For more information on FHA loans, please go to this link. The FHA Expert
For more information on how you can obtain your dream home, please click here : Mortgage Financing Options
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!!
Copyright © 2008 by Jeff Belonger
Keep beating that drum Jeff. Sooner or later, sellers will stop listening to their agents who tell them to reject FHA financed contracts.
MATTHEW..... I think they need the numbers in front of them, like this, in order to compare. Just hearing someone over the phone, it's hard to compute. Especially if the lender isn't explaining it correctly.
MARC...... just as I explained to Matthew, as you mentioned, it does spell it out. Thanks for the compliment.
LENN..... yes, sellers need to stop listening to agents that tell their client not to take an offer with FHA financing. Hopefully sellers will understand this also and become more educated.
I am glad you put the side-by side comparison. That helps a lot of people understand the differences, and see the benefit.
One question I have, though: I know that FHA requires a minimum out of pocket expense by the borrower. They can also get a gift from certain outside sources (Family members, for example.) Can that gift money be used to "buy down" the rate by paying points? Could you post another comparison chart, showing $3000 and $6000 used to pay points, on bothe the conventional and the FHA loans?
I keep hearing that there aren't loans available for someone with a credit score less than 640. Do the special cases mostly revolve around VA loans, or are there other exceptions?
RICH....... thanks.. and glad that it helps some. Gift monies can be 100% from either a family member or a non-profit organization. It can be of any amount and used for anything, so that should cover it.
I did a point comparison breakdown a while back..... The Myths about ZERO point mortgages instead of paying points upfront…… But I will do an updated one in a few days. thanks..
PENNY..... in all honesty, if you find the person spreading these rumors, ask them to leave the business politely. Tell them that they don't need to learn anything at all by delivering papers. Sorry if that sounds rude or cruel, but I am reading and hearing so many misleading comments, phrases, and misleading blogs written, it's not even funny anymore. Many lenders can't go below 580.... I know a few at 530 and I can go all the way down to 500. VA loans are much tougher on credit than FHA is..... I hope this helps some...
DENISE.... what are his prices right now? What county do you live in or better yet, what is your county limit? thanks
LARRY.... and not to sound rude, but I am glad that many brokers don't offer FHA. In regards to why so many dragged their feet to become FHA approved? Money upfront... and assets... and maybe a few think that it will come back soon enough. And don't forget, they say that the new FHA jumbo limits are only good until December...hence, why spend that money for that short time of a period....
My thinking.... how much you want to bet that they extend it for a year or permanently.... then what... those companies really made a bad decision...
GARY..... many lenders and realtors think that FHA is the new subprime.... when FHA has always been around, still was better than subprime, and much cheaper all away around. And the FHA of the new.... nothing has changed since I have been doing this since 1992.... only 3 differences....
- qualifying ratios went from 29/41 to 31/43
- appraisals are now done on the same form as conventional appraisals... & no VC sheet.. so the property conditions are the same
- now there are fico score levels and price adjustments.... prior to '08, there never was....
So if the lender wants to miss the boat, oh well... more for me...as a budding loan officer for a reputable mortgage bank, I have been told right from the start (Jan 08) by the very experienced people there - loan officers, underwriters, legal, etc. - that often, depending upon individual circumstances, FHA loans are a better deal. The RE agents should be educated -they can move more properties. Our limit here is now $281,250.00.
Your blog is informatve.
Roger de Vore
Jeff- Good information and the table really helps drive the point home that FHA can be a great way to go.
Best,
Scott