FHA loans seem to be one of the main choice of mortgages in the last 24 months or so. There are many reasons for this. What I hate hearing is that FHA mortgages have taken the spot of the subprime loans. This is not true by any part of the imagination. This statement is from those that are inexperienced in both the mortgage and the real estate industries. The realization has been that 30% of the subprime mortgages from 2002 to 2006, should have been FHA mortgages, not subprime. But why are FHA loans getting bad press now, stating that they are the most defaulted loans recently? Read this : We should ABOLISH FHA loans...
To compound this, so many said just because you had a conventional loan, you had the better loan. This was not always true when putting 3% or even 5% down. In most cases, you were told this, because that particular lender was not FHA approved. Now? Even with 10% to 20% down and credit scores less than 680, FHA loans in many cases, will be the best mortgage for you. You want to see a shocking example? Please continue...
The example below is based on a $300,000 purchase price with 20% 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 720, certain fee penalties would apply to you, which would increase your rate and or points. The FICO (credit score) that I am going to use is 659 and I will still show in this example that FHA loans are cheaper, even with 20% down. Keep in mind... Don't ever be fooled by that loan officer that says, don't worry, you can refinance later. This is a bad statement for many reasons that I will write about another time.
***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 660. And many lenders can't do FHA loans under 620. At Infinity Home Mortgage, I can do credit scores down to 600 now. Just beware of those that promise you a mortgage with scores under 620. It can happen, but they aren't as easy as advertised. Please read - Credit scores/FICO scores - I need a 700 credit score? ***
Disclaimer : These rates are examples of today's pricing, and the spread shown in the example is real with the same profit margin for both sides. To compare this scenario apples to apples, there are no lender fees and with a half of a point. The conventional rate also includes the penalty for the 659 credit score, hence why there is a half of a point charge, because of the large pricing penalty for the credit score.
**Some of you might be saying that you will be adding $4,200.00 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, you would have spent $621.00 more in payments in 5 years on the FHA loan. Does this mean that the FHA loan is still worse for you? No, it all comes down to your goals. Read on... In 5 years, your principal balance on the 5% would be $1,574 more than the 5.75% rate.
Here is the kicker and why you need a trusted loan officer to educate you. One important fact to remember.... The FHA monthly mortgage insurance in this scenario will fall off automatically in 5 years. Which means an extra savings of $100 per month. So just in another 15.74 months, you break even basically. Yes, there are smaller numbers to review. What if you stayed in your house for 10 years? How many of you move out of your house in less than 5 years, especially in today's economy. Just food for thought.
This information basically states you don't automatically do a conventional mortgage with 20% down over a FHA mortgage. Numbers don't lie, but not being educated about such numbers do mislead.
Lastly, keep in mind, depending on the area that you are buying or refinancing in, that you might not be able to get a conventional loan unless you have 10% down or a 90% LTV. The reason being is the mortgage insurance companies and how they view certain geographical areas and declining market areas.
Which leads me to the issues about Condos. Not only are there restrictions from the MI companies (Mortgage Insurance companies) in regards to what area you live in, but that many lenders won't go above 80% LTV's now on conventional mortgages. On a FHA mortgage for condos, you can still go up to 96.5%, depending on the state, but you still have to make sure that the condo association has been FHA approved. There has been a major change on FHA condo spot approvals. Please read : FHA condo changes for spot approvals - The spot approval has been extended to 2/1/10.
Make sure you know about the NEW FHA loan changes : FHA loan changes for 2010 & why they changed. Reasons for these FHA changes and when they go into effect.
For more FHA loans vs conventional loans comparisons :
- FHA loans vs Conventional loans - A true numbers comparison with 5% down - 12-20-08 -Using a 710 credit score
- FHA loans vs Conventional loans - A real comparison with 5% down - 11-15-08 - Using a 659 credit score
- FHA Loans vs Conventional Loans - 20% down - A Rude Reality Check - 04-03-09 - Would you believe that FHA loans could be cheaper even with 20% down? Come see why and how.
- FHA Loans vs Conventional Loans - 5% - 4 comparisons that you need to know - 05-02-09 -Comparing a FHA loan against 3 types of conventional loans with different types of monthly mortgage insurance. Guess who won while still using a 679 credit score.....
- FHA loans vs Conventional loans - Knowing the true comparisons - 07-10-09 - A great comparison with a 679 credit score and 5% down. This example will still show that even with a better than average credit score, that FHA loans are still better in many cases.
- FHA loans vs Conventional loans - Things you need to know with 10% down, especially in regards to Condos - 09-19-09 -
Donw Payment Series - A Must Read -
- FHA loans vs Conventional loans - A real comparison with 20% down - Part 1 of 3 - 01-28-10 - Not much of a difference, unless you stay in the house for more than 5 years. Hence why a loan officer should be talking about your goals. So very important, yet many dont ask.
- FHA loans vs Conventional loans - Don't be cash poor!! - Part 2 of 3 - 01-29-10 I want to show even a bigger difference if you put less down. And even if you decided to put less than 10% down, because cash is king now. You can't predict even next week. And keeping in mind of some misleading rumors, that you need more than 10% down to buy a house.
- FHA loans vs Conventional loans - Get a bang for your buck - Large down payments aren't always the best way - Part 3 of 3 - 02-01-10 - Some great examples of having cash left over and not really affecting your monthly mortgage payment. And that you will have cash left over for emergencies. Keeping in mind that cash is king.
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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!
Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc
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