FHA loans 101 - The basics of FHA mortgages & mortgage shopping - 10/13/09

By
Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

 

 

FHA loans & their misconceptions/myths

 

fha loans & fha mortgages

 

The number one myth - FHA loans are more expensive than conventional loans!! - FALSE -

 

 

Protection of your family & home purchase will always be with a loan officer with knowledge & integrity… not telling you what you want to hear to make a sale!!

 

 

 

PS… this might be a tad long & boring, but worth it if you are buying/refinancing a home.

 

 

 

I received this e-mail from a borrower yesterday buying in WA. Here are some parts of his e-mail.

Borrower #1

"My real estate agent simply told me there would be more closing cost if I chose FHA, which I don't think true."

A major gripe of mine. When comparing a FHA loan to a conventional loan, you need to compare apples to apples. The only difference would be the upfront mortgage insurance premium (UFMIP). Some loan officers and realtors would like to call this a closing cost. It really isn't. First off, you can roll it into your loan. Hence another myth that some FHA closing costs can be rolled into the mortgage.  Still false, because this is not a lender fee. It's a fee from HUD. Yet some will debate this as a closing cost. It's like the VA funding fee or the USDA's guarantee fee.

 

Same person goes on to say...

"XXXXXXX mortgage is the preferred lender to the property and now offering 4.25% for 30 years. Since my house won't be ready til next spring, XXXXXXXX mortgage can't lock the rate that far.  I was told they were not sure how much the rate would be then.  This part is very scary to me as a first time home buyer without any previous experiences....!!!"

Rut row.... first off, you can't get a 30 yr fixed rate that low. And even if you could, it would cost you like 8 points. So, this loan officer plays the trump card per say. Knowing that settlement won't be until next spring.  This lender is giving an awesome rate that can't be locked in...  hhhhmmm

 

 

Borrower # 2 -

I have a borrower that was referred to me by a realtor. She gives out 3 names to her clients. (there is a reason for this that I don't totally agree with)  I shouldn't have a problem with this, but I do.  In most cases, most loan officers can be very competitive, especially when they know you are shopping.  This realtor prides herself on giving good referral sources that close on time and give good rates with fees. Okay for now, but I have a point to this.

This borrower wants a 30 yr fixed and a 5/1 arm. I give him several good faith estimates and find out that mine are in the top two. I then get an e-mail from the borrower who wants me to be lean on mine, because he was able to get the other lender to cut a few fees.  Huh? First off, I had a $100 fee and this other person had close to $1,000 in fees. Secondly,  I will never be the cheapest, but I will be better than average. In many cases, I will give more knowledgeable information than the other loan officers involved. Okay, sounds like I am full of myself.  But after years of asking the borrowers questions and getting feedback, so many things aren't mentioned.

 

Example - I ask this person their goals, how long they think they will be in the house, baring any work related changes. He tells me that I bring up some excellent points to think about. Because I bring up current rates, the future of rates in 3 to 5 years, home values, the cost of refinancing, etc,etc.  Gee, from his answer, it doesn't sound like the other loan officers bring this up.

FHA myth - the monthly mortgage insurance will never fall off.  It does just like on conventional loans.

FHA fact - No matter how much you put down, you will have the mortgage insurance for 5 years no matter what. He said, well, I hope to have more equity in 3 years.  Good for you, but if you refinance into another FHA mortgage, you will then have the MI for 5 more years. Okay, so I will go conventional.  Good for you, again. But there are many new rules regarding private mortgage insurance.  In many cases, the PMI companies want to now see a 2 year history of payments. If late, this could influence their decisions. Again, just so many unknowns to risk.

 

Onto round 2....  In the beginning, I just give him a 5/1 arm and not details of how an adjustable works, because I want to see if my competition does. After about 4 days of him shopping, I have him call me Sunday night around 7 pm. I ask him if he was told how adjustables work and if he was told the margin on this adjustable.  What is a margin Jeff.. hhhmmm.. Just a fact that could have an impact on his decision and his future.

 

Onto round 3....  The good faith estimate.  I always tell the client how long that rate is good for when giving a GFE, showing their rate and fees.  Many loan officers don't point out that it's good for 30 - 90 days. And if they do barely mention this or they don't bring it up again a few days later, when they give you an updated good faith estimate. I know this because I question and quiz these borrowers.  Overall, until you are ready to proceed with the mortgage application and lock-in, some of these good faith estimates don't mean squat.

 

Overall, there are more loan officers than one would think that don't properly educate the borrower. As a borrower, you don't need a Harvard education, hence why you want to speak to a good loan officer an excellent loan officer. I found many holes in my questioning of this borrower, telling me that he wasn't properly educated with buying a home and shopping for a mortgage. My 30 yr fixed rate with fees were better than the other two.  Yet one offered a very good price for the 5/1 arm. I later refused to give him an updated quote, because after speaking to him and getting to know his goals, it wasn't in his best interest. He was suckered into the lower payment. Don't get me wrong, adjustables have their place, especially with today's rates.  But again, the best rate on paper is not always the best in the long run, no matter if it can be offered or not. Knowledge is power!!!

 

 

 

Just don’t be that shopper that shops themselves out of that good mortgage.

 

 

 

 

For some more good reading :

 

The Basics of FHA Loans - Mortgage 101 for FHA Mortgages - 08/24/09

Credit scores - FICO scores for mortgages - I need a 700 credit score?

Is pre-qualifying a borrower like rocket science??? - Important questions that should be asked by all loan officers.

 

 

 

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- Energy Efficient Mortgages - 

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Experience & Knowledge at its BEST !!!

 

 

_________________________________________________________________________________________

For more information on FHA loans, please go to this link. The FHA Expert

For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!

HUD

 

 

Copyright © 2009 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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- FHA Loans - USDA Loans - VA Loans -

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Experience & Knowledge at its BEST !!!

 

 

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Mortgage Myth Busters

 

______________________________________________________________________________________________________________

For more information on FHA loans, please go to this link. The FHA Expert

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!

HUD

 

For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors

 

Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Gabe Sanders 10/14/2009 02:29 AM
  2. Bill Ladewig 10/14/2009 03:28 AM
  3. Monica Bourgeau 10/14/2009 08:32 AM
  4. 1 ~Judi & Don Barrett & Chassy Eastep - Integrity 10/18/2009 09:15 AM
Topic:
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Location:
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Groups:
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The FHA Mortgage Group
Tags:
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Rainmaker
592,907
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Hummmmmmmmmmmmmmmmmmmmmmm.

"Protection of your family & home purchase will always be with a loan officer with knowledge & integrity... "

That has a familiar ring too it.

Bill

Oct 13, 2009 06:43 PM #2
Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

RICK... . you stated this... "It is not an apples to apples comparison, but it should go without saying that upfront mortgage insurance plus the ongoing mortgage insurance is more expensive than a conventional loan - but of course you shouldn't compare - since one has 3.5% down and the other has 20% down.  It doesn't matter what you call it - it is still a cost to the borrower - just like M.I. is a cost on a 95% LTV conventional."

What you mentioned are unknowns and the statement of that the upfront mortgage insurance is more expensive than a conventional loan is exactly what I am stating.  You are stating a misconception and yes, you can compare apples to apples.  I do it often.

 

Overall, I find it very simple to compare FHA loans vs conventional loans if you use the same down payment and the same credit scores.   In regards to the UFMIP, you stating that it doesn't matter what you call it, that it's still a cost to the borrower.  Sorry, but I disagree 110%, because that is how rumors start and for the reason why so many say that FHA loans are more expansive.  You can't say that, until you compare apples to apples.  Thanks for making my points.  And your second paragraph just tells me that you really didn't read what I had to state and or click onto my comparison link. Hence why I gave you 3 of them this time.

One more thing... you stated this..."Personally, I would counsel my clients that the conventional costs less, all things considered."

That is a blind statement with too many unknowns. There are way too many unknowns and the problem that I have with that statement is that many might read that and stop. And in my opinion, that's the problem with not educating clients properly.

PS... the ongoing mortgage insurance?  Another blanket and blind statement. It's not ongoing once you hit the 78% ltv... so what do you mean by ongoing?  Again, another statement that many consumers and realtors can take the wrong way.   and then to state this???  "but of course you shouldn't compare - since one has 3.5% down and the other has 20% down."

Sorry for taking everything apart, but I just have to question on how you educate your borrowers now. The other has 20% down?  Not everyone doing a conventional loan will have 20% down. I just don't understand your statements. Of course you aren't comparing apples to apples. And that is part of the problem with today's loan officers.  They don't compare apples to apples. Again, I proved that this can be done in each of my comparisons above. Just not sue where you were trying to go with this.  Well, I have a slight idea, but it just doesn't make sense.

 

Oct 13, 2009 06:45 PM #3
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

SIR WILLIAM... yes, it does, because you preach this often.  Not those same exact words, but along the same lines... thanks

 

Oct 13, 2009 06:46 PM #4
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Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

No....I disagree with Rick on this one.  Even a 95% LTV would make me have a client consider the FHA over the conventional.  The PMI is a rated factor anymore.  It's no longer a fixed factor.  PMI is based on equity, ficos and DTI (debt to income).  My thoughts are that universally people are better off with FHA than conventional even with apples to apples.  That wasn't the case a few years ago when the PMI factor would be fixed at .78%.  Needless to say, there are too many variables and PMI would be so much more costly for the client going conventional.

Oct 14, 2009 01:17 AM #6
Rainmaker
98,585
Gerry Suarez Jr.
Jet Home Loans NMLS 1660135 - Maitland, FL
FL Mortgage Guru

With all due respect Rick, you are wrong on this one.

Your idea of comparing apples to apples is exactly on mark but if you take that literally compare 5% down FHA to 5% down conventional. The problem with that is you stop at the APR which does not factor the cost of the monthly MI- a huge downside for the conventional loan, if you can even get it (here in FL it's not an option).

Also your last "assumption" of the 720 score changes the game substantially. Knock the score down by 1 point and redo your numbers...

Lastly you didn't mention the scenario- is it purchase, r/t or cashout refi? Granted with your LTV's it could only be a purchase but as mentioned earlier that's misleading because 95% ltv conventional isn't even available in FL. I'm doing a cashout refi for a gal that's buying out her soon to be ex-husbands interest in the property. At 80.01 LTV conventional ceases to be her best option, and even below that it's close. Just waiting to see what the appraisal is so we can decide how to go.

Sorry if I seem harsh but I feel this is a VERYimportant topic and customers must be shown the advantages and disadvantages of all available programs. If a lender can't do this properly they have no business writing loans.

Gerry Suarez, Jr.

Your FHA Loan Pro!

Oct 14, 2009 02:02 AM #7
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Paul McFadden
Paratex - Seattle, WA
Pest Control, Seattle, WA.

Thanks, Jeff. Good post as always. I'm going to correct one thing here and side with Rick. First of all, I agree with you about it being important to compare apples to apples. But if a client has a 720 credit score, I would bet the conventional loan is cheaper, even if they can't put 20% down. I would hazard to guess that you meant for all options (credit scores down to 620). Then, FHA would be cheaper. There still is an aversion to paying mortgage insurance with my clients but the reason why is most of them have stellar credit and can go to less than 80% LTV. Don't get me wrong. I love FHA and it's a significant part of my business for all the reasons you stated above. I also am aware that you do a ton of FHA loans and know you will always choose the best option for your clients. Thanks again for the post. Keep it up!

Oct 14, 2009 02:26 AM #8
Rainmaker
4,790,410
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Jeff, thanks for the great info.  I've re-blogged this one.

Oct 14, 2009 02:30 AM #9
Rainmaker
28,501
Colleen Craig
Southern California Mortgage Professional - Santa Clarita, CA
Socal Mortgage Pro

Jeff,  somthing noone has mentioned is that some realtors think the closing costs are more on FHA is because it requires an impound/escrow account.  In CA most people don't opt for having their taxes and insurance included in their mtg payment - but we all know that with FHA that is not an option.  So this is something required up front making it seem like it cost more.  I've had to educate people that you are not paying MORE in closing costs - you are just paying your taxes/ins at closing instead of two three or four or 12 mths later!  Second - i find the apples to apples comment hysterical.  Shouldn't it be you can't compare apples to organges but you MUST compare apples to apples?  Anyway - why would anyone be comparing an FHA to a 5% conventional loan these days?  maybe it's just me in CA but you can't even do a 5% conventional loan here anymore.  Anyway - great post as usual - very informative for the client that only gets bits and pieces of information out there!

Oct 14, 2009 03:36 AM #10
Rainer
295,458
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

"My real estate agent simply told me there would be more closing cost if I chose FHA, which I don't think true." ... Well there's one of the first problems, a Realtor giving advice outside of their expertise/knowledge. This is not to say some Realtors don't know this info, but in my experience most have little or no clue.

Oct 14, 2009 04:44 AM #12
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

RICK.... comment # 5 . you still aren't comparing apples to apples.  A FHA loan with 3.5% down is not the same as a conventional loan with 5% down.  But here is the kicker. You said, compare the APR.  Just because the APR on a FHA loan will be higher doesn't mean the FHA scenario is worse.  You still aren't truly comparing apples to apples.  Because the UFMIP is in the APR, but you still have the total payment that needs to be compared, the longevity of when you break even, and the question of how long you will be in the house. There are way too many factors for you to make that assumption.  An assumption that is overused used more times than none, hence why so many borrowers have received wrong information on this.

You then make this statement... "In my experience the 1.75% upfront MI and the ongoing factor of .55 is higher than the conventional factors for M.I. "

Not bashing, just a question. In what experience is that?  The .55 is higher then the conventional?  Sorry, but both of your comments have many unknowns still and that is just wrong.  With a 95% LTV, the MI factor on a conventional loan is .78 or higher.  So how can the .55 on a FHA be higher?  Once you have a 95% LTV or lower, the FHA drops to .50.  On a conventional 90%, it's .52 or higher...  so I am still confused, because you keep bringing up these so-called facts, yet you aren't comparing true details.

Lastly, you finally state that this is based on a 720 credit score. Sounds great... But 2 important issues...  first off, a 720 is not the norm in today's industry.  Secondly, you just now mention 720, yet all of your other comments were arguments about this and that, but still never comparing direct facts. Yet you still want to compare 3.5% with a 5% down payment... that is not a true comparison. You then have to compensate for the extra 1.5% down, which in reality now covers most of your UFMIP.  So now you have a difference in MI payment, which would be lower on a FHA loan than a conventional loan.  So I will do a comparison for you tonight based on these 2 differences.  Because I just don't think you truly understand FHA and these comparisons and how to compare.  Sorry, just my opinion based on your comments.

 

LARRY.... .  I agree 110%.  The only Rick ahs thrown out there now, is comparing all of this to credit scores of 720... which I think is a weak comparison because this is not the norm.  The average clients fico scores aren't 720, nationally. Maybe in a small region or market...  but I write on a national market, not a local market. Rick's debate and examples are not clear at all.  I could go on further about this, but I won't. Also, he obviously didn't read my links in regards to the comparisons.  How does one compare 50% down to 10% down?  lol  It's not a true comparison. Besides, you are so right on the MI factors..  so many of them are now based on LTV and credit scores...  it's even rare to see a .78 on a 95% conventional loan.

 

GERRY.... . I agree that Rick is off the mark on the APR. APR is not the actual true costs as many would think, not in his scenario. I will be writing a blog comparison on this tonight. And sure, when you through in a 720, it does change everything.  What got me was that he started to argue the point several times, then throws in a 720. I am sorry, but that is not how I compare things. We need to discuss all of the unknowns upfront first... such as fico score, down payment, loan amount.  Yes, you even need a loan amount, because the higher the loan amount, the more it can change any example, even with a 720 fico score. Great example... how about FHA jumbo loans compared to conventional jumbo loans if that loan is not a high cost loan. Even at a 720 credit score, that FHA loan will be cheaper in payment then, even with the 1.75% added onto the loan. Again, false comparisons with little or no information, just assumptions.

Overall, it's irrelevant if it can be done in Florida or not, not when I am trying to compare the basics. But you are 110% correct on the fact that we need to show the advantages and disadvantages when comparing loans.  Such as I do in each of my comparisons, even showing the 1.75% UFMIP...  and if a loan officer can't do this properly, they should not be in this business.  BINGO... right on the money with that one.  thanks

 

PAUL.... . you can agree with whomever you want.  You stated this... "But if a client has a 720 credit score, I would bet the conventional loan is cheaper, even if they can't put 20% down."

Question to you and Rick.. did I ever once in my blog above give a credit score or 20% down?  No...  I never said that with that example, that FHA would be better. Hence why I do specific examples. I am still confused to why you are even stating that.  Just because Rick did so you have something to agree with him on?  I am baffled and confused.

You then go onto saying this.... "There still is an aversion to paying mortgage insurance with my clients but the reason why is most of them have stellar credit and can go to less than 80% LTV."

Sorry, but we have been over this before, several times. You keep bringing up your clients. My posts aren't market specific, they are general.  Each market is different. Good for you that most of your clients fit that great fico score. That is not my point in this whole post. My main point is that you need an excellent loan officer that can not only compare these options correctly, but educate the borrower properly. There are many loan officers that just give the basics and or just know the basics. Some of the comments just proved my statement. Hence the same statements that I made in my blog above. You have loan officers advising on specific FHA loans, but don't tell the borrower that the monthly MI stays with you for 5 years no matter what.  Hence why I wrote part of this. I was going over the borrowers refinance options and he thought he could just refinance into another FHA mortgage 3 years from now, if he had 20% equity in the property.  It doesn't work that way, at all. Again, hence why I wrote this post. And if you and Rick want to debate specifics, then read my comparison blogs.  Those are debating apples to apples and specifics... not just generalizing. Just my opinion that a few others seem to agree on.  thanks

 

GABE.... thanks for the reblog and for stopping by as usual.  thanks

 

Oct 14, 2009 05:35 AM #13
Rainmaker
149,067
Gary Miljour
Lend Smart Mortgage NMLS#207208 - Southern Pines, NC
Mortgage Originator NMLS Licensed in AZ and NC

Rick,

The biggest factor that you are not looking at is the bottom line for the client and that is the payment.  If I took a 5% FHA loan with the ufmip of 1.75% and a .55% factor for MI at 720 credit, the payment would still be less on FHA.  Numbers and Mathematics do not lie.

Also, you are forgetting that the interest rate on the Conventional loan is actually higher because of the 10 year note vs. the Fannie Coupon rate.  Bottom line here is that Jeff is right when you compare apples to apples the FHA loan will be more beneficial to the client.  But a lot of Loan Officers will not take the time to pencil out the numbers and compare payments. 

 

Oct 14, 2009 05:52 AM #14
Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

COLLEEN.... . yes and no... you can only make that comparison on those conventional loans with 20% down or more.  Again, we are leaving out details when we try to debate and or give examples. You again stated that it's an option, but don't say that it's only an option if you put 20% or more down. I am just a stickler for details and making sure that everyone is on the same page. I know what you are saying, but we need to make this very clear.

In regards to the phrase comparing apples to apples, and maybe to oranges./..  true, but in my opinion, I feel that it can still be called apples to apples if you compare it correctly.  Meaning that if you compare a FHA with 5% down to a conventional with 5% down.   But I am going to appease Rick and a few others and do two comparisons with his 3.5% to 5% down comparison and a 20% down one.  I think some people are missing the basics here and it is hysterical, yet sad.  No wonder the borrowers out there get misinformation.  thanks for the compliment and for the comment.

 

RICK.... . that was my whole point.  You were assuming and comparing your own issues.  And those comparisons still were comparing apples to apples. Again, some missing the main point. We need to show and compare these apples to apples correctly. Too many loan officers assume and give the borrowers wrong info, just based on an assumption. Ouch... sorry, but that is not good at all. Not pointing fingers, but you even said that you assumed. I pride myself big time on comparing this stuff and try to never assume.

You then state this... "It does look like the monthly M.I. is cheaper for FHA - but the real imp. # to me is the 1.75%, or $6,650 to absorb that FHA has that conventional doesn't.  Whether it's rolled into the loan or not, it still is a greater debt for the borrower."

Breaking this down into 2....  it does look like the MI is cheaper for FHA?  Again, you need to clarify specifics.  The MI on a conventional loan with 15% down might be a tad cheaper, but we still need fico scores. So I don't think you understand the true differences and that we need to give details and not assume or speculate.

Secondly...  you still harp on the 1.75%... in all of my comparisons, even if you roll it into the loan and absurb that cost, FHA was still cheaper, in my examples.  Again, you are just assuming based on the 1.75% itself. And that in itself is just plain wrong.  Sorry, if you might feel this is bashing, but I have shown this in my examples, dollar for dollar. Again, you are just assuming because you use a dollar amount of $6,650. You still need to compare the outcome and not the dollar amount. And this is just not my opinion, but based in simple math comparisons. thanks  PS.. you even make a statement that you don't do FHA loans..  so how can you debate them then?  Just curious...  the numbers work if you do them correctly. Each borrower is different no matter what. Please read :  I want the same deal that my friend got !!!

 

STEVE.... . I agree, and that is a huge problem, hence why I included that from the person that sent me that e-mail. thanks

 

Oct 14, 2009 06:01 AM #15
Rainer
67,579
Jay-Paul Lowry
Riverside, CA

good God Jeff. The comments sectionwas better than the blog but then again you wouldnt have had the comments with out the blog.

 

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

Oct 14, 2009 06:29 AM #16
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Monica Bourgeau
New Phase Business Coaching - Portland, OR
Business Coaching

Jeff - great post, I think it can be difficult for consumers to compare loans and know which one is the better deal a lot of times because there are so many factors. It pays to take the time to understand the different options and the pro's and cons of each. -I reblogged your post to share with our readers too :)

Oct 14, 2009 08:39 AM #17
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Celeste "SALLY" Cheeseman
Liberty Homes - Mililani, HI
(RA) AHWD CRS ePRO OAHU HAWAII REAL ESTATE

Well, looks like i missed the comment stream somewhere but as always you have wonderful and informational posts on the loan programs.....and what to look out for as well!

Oct 14, 2009 09:52 AM #18
Rainer
4,887
Tom Caulfield
First Financial Lending Corp. - Grosse Pointe, MI

Wow.  It has been nice to read everyone's comments.  Nice Blog and the comments are full of information.  Thanks.  With the new changes comming to REG X effective 1/1/10, and HUD's thought that these changes will "help" borrowers compare mortgages... Should really make things interesting.  If you have not heard of these changes yet, you may want to check out the HUD site and start reading! 

Oct 15, 2009 03:00 AM #19
Rainmaker
58,514
John Neil
Bank of Utah - Logan, UT

It's also very possible that people have the misconception that FHA costs more than Conventional because the spread between interest rate and APR is almost always higher on FHA loans.

Oct 16, 2009 08:52 AM #20
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1 ~Judi & Don Barrett & Chassy Eastep - Integrity
Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745 - Idabel, OK
BS Ed, Integrity Real Estate Services -IDABEL OK

Jeff,

You are a true blessing to me.  I gather info from your blog for my clients.

Thanks!

Oct 18, 2009 09:14 AM #21
Anonymous
David C

Let's not kid ourselves here, this isn't rocket science.  You have formulas and rules and you work within those to create the best alternatives for your clients.  Some borrowers will have multiple financing options while others may be limited.  So let's look at someone who has multiple options since the "argument" keeps returning to the credit score and down-payment.  Here goes!

 Let's assume borrower X has only 3.5%(from a gift or savings) to put down on a purchase and has a credit score lower than 720.  In most if not all cases borrower X should and will go FHA.

 Borrower Y has 5% to put down on a $325k purchase, a 740 credit score,  plans on living in the home 4 -7 years and they don't want an ARM.   For argument sake, let's just limit the options between FHA and LPMI (lender paid MI) since we all agree that the floating PMI option is a wild card that we can't pin down.  When I say LPMI, I assume you understand that the MI is built into the rate so said borrower doesn't pay a monthly MI, they simply assume a higher rate.

Ms. Y, here are your options:

FHA 3.5% down but with a charge of 1.75% that can be financed into the loan.  Sure this isn't technically a "closing cost", but you're paying for it and it is a "cost".  You will also have a monthly mortgage insurance of .55% of the loan amount.  Here is what it will look like...

$325k purchase

$11,375 down

$5488.43 UFMIP financed back into the loan (see the term "cost" above)

$319,113.43 will be your final loan amount

$1762.15 P&I at 5.25% with no points

$146.26 will be your monthly MI

$1908.41 P&I plus monthly MI

 

If you go with the FHA 5% down option to really compare your "apples to apples" (a term I hate):

 

$16,250 down

$5403.12  UFMIP

$314,153 final loan amount

$1734.76 P&I at 5.25% with no points

$130.89 monthly MI (factor fell by .05% due to LTV = 95%)

$1865.65  P&I plus monthly MI

 

Finally your Lender Paid MI option:

 

$16,250 down

$308,750 loan amount

$1801.78 P&I at 5.75% with no points.

This loan isn't for everyone, but in this case it's a better option for this specific buyer.  It's that simple.  Borrower has some savings, why pay the extra fee's (financed or not) if they don't have to?  In this specific case, the borrower saves $64 a month and an additional $5403 by paying a little higher rate. 

I'd add my email but due to my employer's internet policy, I can't.  Best of luck to all of you.

Oct 19, 2009 06:26 AM #22
Rainmaker
210,006
Marzena Melby
Coldwell Banker Burnet Realty - Richfield, MN
Realtor, Twin Cities Minnesota Real Estate

Hi Jeff,

OK, we got the credit extention... You probably don't like it, yet... it will help some people to move up since they have no equity in their current home.  So, it will help the market somewhat.

Nov 17, 2009 03:10 PM #23
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