FHA or Conventional?

By
Mortgage and Lending with Vandyk Mortgage Company

 

Government sponsored loan programs, such as FHA loans, have been getting a lot of press lately. But, how does one know what real estate home loan is right for them. An FHA loan differs from a conventional mortgage loan? What are the advantages of each?

FHA

The Federal Housing Authority (FHA) was created in 1934 to help potential homeowners gain access to money to boost homeownership rates throughout the United States. FHA loan programs require very little money down on a new purchase (usually only 5% of the purchase price) and will lend up to 95% of the value of a home on a cash out refinance. This high loan-to-value ratio is the primary appeal of an FHA transaction.

The FHA is not a lender and does not actually make or guarantee home loans. They insure the loans we can assist you in obtaining.

FHA currently only offers three loan programs::
30 Year Fixed
15 Year Fixed
5 Year Fixed

FHA Mortgage Insurance Premiums (MIP)
Every FHA loan requires Mortgage Insurance Premium (MIP) regardless of the down payment amount or loan to value. In addition, FHA loans require Up-Front Mortgage Insurance Premiums UPMIP). The UFMIP can be financed into the loan.

FHA also has maximum loan amount restrictions that differ from county to county. See below to view the maximum loan amount in your area.

Conventional loans

There are three types of conventional loans: conforming, super conforming and jumbo.

Conforming loans
A conforming loan requires a loan amount of $417,000 or less. Conforming loans offer a larger variety of Loan Programs than FHA with a wide array of lending options. A conforming loan generally requires a larger down payment for a purchase (usually at least 5%) and has more restrictive guidelines on getting cash out of the property for a refinance.

The big advantage of conforming loans is that they do not require Private Mortgage Insurance (PMI) if the loan amount of the new first mortgage is 80% or less of the value of the home. The elimination of PMI can offer a significant savings over the life of the loan.

Additionally, conforming loans offer interest only options. FHA currently does not allow interest only payments.

Super Conforming Loans
On January 1, 2009 the "super conforming" loan was created for loan amounts up to $625,500. These new higher loan limits were meant to be crossover loans for high cost areas where housing values tend to be higher. Super conforming loans are only available in certain counties and generally have more stringent lending guidelines than a conforming loan. See Below to see the maximum super conforming loan amount in your county.

Jumbo loans
A jumbo loan is any loan amount over the super conforming loan limit. Jumbo loans generally have slightly tighter lending standards and may require a down payment of at least 10% of the purchase price. Jumbo loan programs are as diverse as conforming loan programs and also do not require PMI if the loan amount is less than 80% of the value of the home.

Summary

So, to summarize, it is really all about loan-to-value. If you plan on putting down a small down payment, than an FHA loan is most likely your best bet. But, if you are putting down a larger down payment, a real estate home loan conventional program will be the way to go.

Choosing whether an FHA or conventional real estate home loan is best suited for you, is important to choose an experienced FHA Loan Officer. Get started by calling our office in Groveland Ca, we stand by to help you choose which option is best for you.

Mortgage Insurance Premiums (MIP)

FHA mortgage insurance, typically referred to as MIP, is the one closing cost that is unique to FHA mortgage programs.

**Every FHA mortgage must have mortgage insurance regardless
of the amount of the down payment.**

There are two types of mortgage insurance for FHA insured loans - Up-front Mortgage Insurance Premiums and Monthly Mortgage Insurance Premiums.

Up-front Mortgage Insurance Premium (UFMIP)

UFMIP is calculated at 1.75% of the base loan amount on all loans, regardless of the down payment amount. This insurance protects the lender against losses in the event that the borrower defaults on the loan.

**The entire amount of the UFMIP can be financed into the loan amount!**

For example:

· If the FHA loan amount is $100,000 (base loan amount)

· The mortgage insurance premium would be $1,750 ($100,000 x 1.75%)

• The mortgage amount including MIP would be $101,750 ($100,000 + $1,750)

 

What really happens during an FHA mortgage transaction is that the borrower owes FHA a lump sum mortgage insurance premium. The lender making the FHA loan will actually lend the money for the premium to the borrower and send the money to FHA so that the mortgage will be insured.

Monthly Mortgage Insurance Premium

In addition to the UFMIP, there may be a monthly premium due as well. The monthly premium is .55% of the base loan amount.

On a 30 year fixed loan, the monthly payment would be calculated as follows:

$100,000 x .55% = $550.00 / 12 months = $45.83 per month

There are two types of monthly mortgage insurance for FHA mortgages:

Condominiums - Monthly mortgage insurance on condominiums is stable at .55% over the life of the loan.

All other properties - The amount of monthly MIP and the length of the premium depends upon the amount of the down payment or the loan to value.

For 30 year mortgages closed after January 1, 2001, the monthly insurance premium is eliminated when the loan balance is 78% of the original purchase price, provided the premium has been paid for at least five years.

FHA Minimum Down Payment
Effective January 1, 2009, the minimum down payment required on an FHA loan is 5.0% of the purchase price.

Any deposit (usually called earnest money) that you are required to give to your realtor at the time of an accepted purchase contract will count towards your 5% down payment. The appraisal fee collected at the time of inspection will also count towards your 5% down payment.

If, for example, you are purchasing a $100,000 house, your minimum down payment required would be $5,000. If your seller/realtor required you to put down $500 in earnest money on top of the $300 for your appraisal, your down payment would be lowered to $4,200 ($5,000 - $500 - $300 = $4,200).

Down Payment As A Gift

If a borrower does not have 5% of his or her own money to put down towards the home purchase, FHA allows that amount to be in the form of a gift to the borrower. The gift must be from a qualified source, such as a family member, employer or significant other. The source of the gift must be able to provide proof that they have the money in an account registered in their name prior to transfer to the borrower.

In some areas, this gift may also be grant money from a state or local municipality, if such funds are available.

Closing Costs

Borrowers closing costs involve many of the typical costs associated with a mortgage loan, such as appraisal, survey, title insurance, etc. However, FHA recognizes that a borrower has limited funds and allows the borrower to finance a certain percentage of these costs to calculate the maximum mortgage a borrower can obtain.

Seller Paid Costs

Sellers or other third parties such as real estate agents, builders, developers, or combination of parties can contribute up to 6% of the property's sale price towards the buyers actual closing costs, prepaid expenses, discount points and other concessions.

Closing costs normally paid by the borrower are considered contributions if paid by the seller. If any of the allowable closing costs are paid by the seller or other interested parties, they cannot be included as part of the borrowers required 5% cash investment.

FHA Loan Limits By County:

** all counties not listed are capped at $271,050 for 2009

Alameda County CA $625,500
Alpine County CA $463,450
Amador County CA $332,350
Butte County CA $293,250
Calaveras County CA $373,750
Contra Costa County CA $625,500
El Dorado County CA $474,950
Fresno County CA $281,750
Humboldt County CA $327,750
Inyo County CA $369,150
Los Angeles County CA $625,500
Marin County CA $625,500
Mariposa County CA $322,000
Mendocino County CA $373,750
Mono County CA $529,000
Monterey County CA $483,000
Napa County CA $592,250
Nevada County CA $477,250
Orange County CA $625,500
Placer County CA $474,950
Plumas County CA $336,950
Riverside County CA $355,350
Sacramento County CA $474,950
San Benito County CA $625,500
San Bernardino County CA $355,350
San Diego County CA $546,250
San Francisco County CA $625,500
San Joaquin County CA $304,750
San Luis Obispo County CA $561,200
San Mateo County CA $625,500
Santa Barbara County CA $603,750
Santa Clara County CA $625,500
Santa Cruz County CA $625,500
Shasta County CA $273,700
Solano County CA $400,200
Sonoma County CA $520,950
Stanislaus County CA $276,000
Tuolumne County CA $331,200
Ventura County CA $598,000
Yolo County CA $474,950

Presented By: MaryAnn Sumaraga/FHA Specialist

Real Estate Home Loans 4u, Groveland Ca 

http://www.homeloans-4u.com/blog

Comments (9)

Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Maryann....   you talk about the main difference on these loans are the LTV, the down payment. In my opinion, the main concern and point should be the borrowers fico score. Many assume that if you put 20% down, that a conventional loan will be better than a FHA loan. That is not true at all, depending on the credit scores. Please read this :  FHA loans vs conventionals with 20% down

Also...  there are a few other things that I noticed...  please look into the down payment and the FHA programs.

Jeff Belonger

Apr 10, 2009 01:42 AM
Jay-Paul Lowry
Riverside, CA

Maryann - I believe some of your loan amounts are off...for ex San Bernardino Riverside Count says $335,350 on your post but from HUD's website it says....

RIVERSIDE-SAN BERNARDINO-ONTARIO, CA (MSA) 40140   RIVERSIDE 065 CA $500,000 $640,100 $773,700 $961,550 01/01/2009 CY2009

 

the 500k amount is for SFR, the next is for Duplex, then Triplex and Fourplex follows.

 

for your reference https://entp.hud.gov/idapp/html/hicostlook.cfm

 

JP Lowry--President--Preferred Financial Funding, Inc

Apr 10, 2009 05:24 AM
Peter Cannon
New Berlin, WI
NMLSR ID 400610

good comments, however you just need 3.5% down with FHA

Apr 11, 2009 02:41 AM
MARYANN SUMARAGA
Vandyk Mortgage Company - Groveland, CA

In regards to the loan limits in San Barnardino comment: I got this county list from hud directly but I see what you mean when you actually enter the county..Thanks for the input and will correct by just adding the link.

Jun 26, 2009 07:39 AM
MARYANN SUMARAGA
Vandyk Mortgage Company - Groveland, CA

Jeff, you are absolutely correct in that I didn't mention the credit score which is a very important fact. Thanks for your input. Thanks for the link

Jun 26, 2009 07:40 AM
MARYANN SUMARAGA
Vandyk Mortgage Company - Groveland, CA

I haven't not found any lender that is doing an FHA loan with less than 5% down which took affect as of January of this year. If there is anyone out there that confirm that there is a lender that is accepting 3.5% please let me know who they are..

Jun 26, 2009 07:43 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 MaryAnn... we underwrite all of our FHA loans... and sell them after they close to investors.  Every investor that we use always for 96.5% LTV's... I have never heard of any lender not going below 95%.  HUD put out the new downpayment mortgagee letter in September.  http://www.fhaloansfhamortgages.com/fha-loan-changes-in-the-near-future-part-3-of-3-new-fha-downpayment-aamp-maximum-mortgage-requirements

jeff belonger

 

 

Jun 26, 2009 07:49 AM
MARYANN SUMARAGA
Vandyk Mortgage Company - Groveland, CA

I work for broker who is FHA approved and I know that with the mip financed the ltv is at 96.5%. Is this what your are talking about?

Jun 26, 2009 08:23 AM
MARYANN SUMARAGA
Vandyk Mortgage Company - Groveland, CA

Here is my calculations if I had a 300,000 sales price my base loan amount would be

$289,500  base   1.75%  $5066.25  = $294,566 total loan amount    98.20% LTV in this case.

you are right and I was wrong... don't know where my brain was...I just checked it out and want to thank you for your information.. now that I was set straight in my calculations...

Jun 26, 2009 08:53 AM