The Mortgage Hype that seller concessions on Conventional loans could be the better play than on FHA loans - Facts & Numbers vs Assumptions - Part2

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

 

Facts & Numbers vs Assumptions - Part 2

 

mortgage interest rates - facts and numbers

 

I love what I do and I love crunching numbers, sometimes being creative and finding a way to maximize my clients cash assets, putting them in a good financial position for years to come. Meaning that I like to act like a financial planner, making sure that the borrower doesn't always use all of their assets, especially in today's market.

Before you continue with this post, you will need to read part 1, Planting Seeds in the Borrower's Head. If you want the cliff notes version, read the next few sentences below.

I truly believe as a loan officer, that I do my job as well as I can, with pride and satisfaction. That a realtor should not give mortgage advice deeper than the basics. The basics would be to know what programs are good in your area, and that you ask a few simple questions to make some determinations. Other than that, the realtor should not get into the rates and down payments. I hope to explain better below.

 

 

 

So what am I questioning?  It's when a realtor makes a statement such as this one.  "home buyers can receive 6% closing help with 10% down.  Which benefits our buyers more, making a larger down payment or paying their cash for closing costs???" - How about possibly neither, which I will show below. The last comment was followed with this kind of comment. - "The lower interest rates often offered with 10% down compared with FHA may make the conventional more attractive. " These same statements are mentioned in part one and written by Lenn Harley.

If you remember the title of Part 1, it was Planting seeds in the borrower's head. Read my conclusion in part 1. I truly believe when you talk about such statements, that you could be planting a seed in the borrower's head. This could confuse the borrower or even worse, make them choose your thoughts without knowing the details.  Let me show you what I am talking about.

 

 

Key Important Points -

  • If the property is in a distressed area (declining market), the maximum LTV is 90%, which means you have to put 10% down.
  • The monthly payments on the conventional loans can increase or decrease depending on the credit scores.
  • Each scenario is the same profit margin. You would need a credit score of 720 + to avoid any pricing penalty.
  • Most PMI companies won't go below a 680 credit score.  There are a few that could go down to 660, but depending on the status of the lender with that MI company. But in all honesty, FHA loans would be the best option once you go below a 680 credit score. So why even bother with details.

 

The scenarios used below are based on a mid credit score of 699.

FHA Loans vs Conventional Loans - 8-5-10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Now, there are a few other scenarios, such as lender paid mortgage insurance (LPMI) or 80/10 or lender paid closing costs (which you increase the interest rate which pays for some closing costs), and a few other mortgage insurance programs. But I just wanted to give you an idea on the statements that were mentioned above and how one needs to be careful in what they state to the buyer.

On another note, FHA is trying to reduce the seller help from 6% to 3%.  HUD seeks public comment on three main issues for FHA loans.  In the examples above, I decided to pretend that FHA's seller help was reduce to 3%. 

 

Reminder : - Comparing 10% down conventional with 3.5% down FHA - In regards to the money that you don't use on the FHA loan, you either save it as cash on hand or you could invest it. You can usually get a 6% to 7% return on your money. If you have a decent idea or work with a good financial planner, you could get 9% to 10%. If you really know what you are doing and or are aggressive, you could get like 12% return. And please don't read into those that sell you the idea to pay down your house off in half the time. There are some scams out there. They work, but not as advertised.  Secondly, you will be writing off less interest if you pay off your house quicker. And the interest write off on the interest rate itself, depending on your interest rate, might not be as much as you think. Just food for thought and showing the complexities when comparing different types of mortgages.

 

 

Key Important Reminder -

Lender Overlays and different PMI companies (private mortgage companies) have different guidelines and rules. Also, when doing a conventional loan with MI, you will also have to send the file to the MI company to be underwritten.  So even if your company says yes, the MI company could still say no. On FHA loans, it's just underwritten once.

 

 

 

Conclusion : Many would think and or assume that with 10% down on a conventional mortgage, that it could be cheaper in interest rate and in payment than on a FHA mortgage with 3.5% down.  And in some cases, even though your down payment is more with a conventional loan, it could cost you more out of pocket or possibly more within the price of the home because some sellers will tack on the seller concessions onto the price. And look at the fact that you added about $6,000 of upfront mortgage insurance on the FHA loan, yet the FHA loans look to be cheaper all the way around. And you can compare the principal balances after 5 years and how much cash that you kept in your pocket with a lower monthly payment. Food for thought.

Cash is King - I highlighted the FHA loan scenario with 5% down. As you can see, the mortgage payment would actually be about $30 less than when putting 10% down. What I hear so many people focus on is the fact that they don't want to be underwater on the property.  People, buying a home is suppose to be an investment and in many cases, a long term investment. This is a whole other topic, but it needs to be discussed. You just never know what will be around the corner and having a larger savings could save you down the road. I wrote an excellent series on this topic.  Click on the Cash is King link.  Part 2 of 3  -

Numbers don't lie, uneducated facts or assumptions do.

 

 

UPDATE : I had originally worked on this post starting at 3:30 am this morning and had most of it done by 7 am. But I didn't submit it because I had to check out one issue and then the day got away from me.  But Mr. Stevens of FHA has announced new upfront mortgage insurance changes and changes for the monthly. In my opinion, the 5% comparisons, FHA loans will still be the best option, even with a credit score of 699 or less. In regards to the 10% down on conventional loans?  The payment might be better by $100, but still keeping in mind that you are keeping $13,000 in your pocket.  You need to think of the trade off and your future. Here is the link to the letter from FHA Bill approved to give FHA the ability to change upfront and monthly mortgage insurance.  I will be writing about this tomorrow and giving examples.  thanks

 

 

 

 

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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 © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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follow Jeff Belonger on Twitter

 

The FHA Expert's fan page on Facebook     Add Jeff Belonger to your network @ LinkedIN

                                                                            FOLLOW ME ON FACEBOOK

 

 

- FHA Loans - USDA Loans - VA Loans -

- Energy Efficient Mortgages - 

- Conventional Loans - 203 k loans -

- FHA Home Loans - Mortgages -

 

Experience & Knowledge at its BEST !!!

 

 

Follow me on:

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

Topic:
Lending / Financial
Location:
New Jersey Hunterdon County High Bridge
Groups:
Realtors®
Mortgages
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Realtors Needing the services of the Lending Powers
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Tags:
fha
fha loans
seller concessions
seller paid closing costs
conventional loans
fha mortgages
fha home loans
paying mortgage points

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Ambassador
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Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

I am really enjoying these posts and in reblogging them for all of my clients! Thanks!!!

Aug 05, 2010 09:31 AM #1
Rainmaker
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Susan Haughton
Long and Foster REALTORS (703) 470-4545 - Alexandria, VA
Susan & Mindy Team...Honesty. Integrity. Results.

Thanks not only for the very clear explanation, but for the chart, as well, which made it very clear.  Thanks!

Aug 05, 2010 09:40 AM #2
Rainmaker
593,063
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Jeff,

I'm on my way to board meeting, but!

"putting them in a good financial position for years to come. Meaning that I like to act like a financial planner, making sure that the borrower doesn't always use all of their assets, especially in today's market."

This rates a pat on the back and a dynamic "AT A BOY!"

Bill

Aug 05, 2010 11:23 AM #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

 

BARBARA JO.... . my pleasure and thanks for your support. Also, thanks for reblogging this and for the kind words.

SUSAN... .  charts always help and sometimes help to see it than to read it.  And sometimes allows you to focus on the numbers than trying to read them in the sentence.  thanks

WILLIAM... . well, I am glad that you stopped by prior to going to your board meeting. Thanks for the polite compliment.

 

Aug 05, 2010 12:40 PM #4
Rainmaker
225,658
Tim Bradford
Cleveland, OH
NMLS 250013

Jeff,   According the The Stevens newsletter today ( http://portal.hud.gov/portal/page/portal/ver-1/HUD/federal_housing_administration/docs/August_Special_Edition_2_FromtheDeskOf.pdf ) it appears HUD plans on Changing the Upfront and Monthly MIP effective with Case Numbers Sept 7, 2010.   Did I miss the Public Comment Period?   

With the change, you will have to change the math.  If HUD does go with the .85/.90 Monthly and the 1.00% upfront financable, with a 10% Down it appears the Conventional option above a 700 Credit Score is the easy winner.   And when using the One Time Upfront Premium will remain the winner. 

I will be working the numbers with 5% down and see how those look with FHA Proposed Change.  Proposed because not sure how final it is. 

Aug 05, 2010 02:07 PM #5
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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


TIM... I know this... but what you don't know is when I actually did this post, even though my time stamp shows 4 pm.  I started working on this post at 3:30 am this morning and had most of it written by 6 am.... but then things popped up and I just said I would submit this and link Stevens newsletter later.  You are asking about the public comment period. I am not sure why you would think this. If you remember the proposal by HUD back in January on this issue, they said that this change will probably go into effect in late July. HUD only needs the approval of the House and the Senate to change monthly mortgage insurance. The house approved this about a month ago and the Senate just approved this.

In regards to my math?  I am not worried about it because if you understand this new change, you will know that FHA mortgages will still be better in many cases, even with 10% down, if your credit scores are under 700. If you read my post, this was based on 699 or lower, not 700.  if you want to compare 5% down on both FHA and conventional, without even doing the numbers, FHA will still be better in this scenario. Look at my payment difference right now. That is a $173 change.  Off the top of my head, without running the numbers, even if the FHA payment increased by $100, FHA will still be cheaper by $73 a month.  Still a big savings, and the MIP will be less.

Overall, I will be posting about this tomorrow, the new change, and giving examples.  One of my main points in this post, was not to put 10% down just because... keep the money in your pocket.  thanks

 

Aug 05, 2010 02:50 PM #6
Rainmaker
144,804
Markita Woods NMLS#196099
Fairway Independent Mortgage - Woodbridge, VA
Queen of Mortgages - FHA, VA, Conventional, USDA

Jeff thanks for the content rich post. I too am reblogging.

Aug 05, 2010 03:06 PM #7
Rainmaker
225,658
Tim Bradford
Cleveland, OH
NMLS 250013

Just Sharing information recieved with the Steven's Annoucement.   

With regard to Public Comment, I do not believe you or I like the decreased Upfront and Increased Monthly, because of the higher payment it creates.   Because they put the reduction of Sellers Assistance out for public comment, I assumed we would see a similar opportunity to make comments on the changes to the MIP as well.  Bad assumption on my part, I guess.    

Aug 05, 2010 03:18 PM #8
Rainmaker
70,797
Loan Survivor Real Estate Financing Expert
Purchases, First Time Buyers, Pre-Approvals, Refinance - Birmingham, MI

Jeff, why the 5% conventional rate AND the hit for the overlay points?  Am I missing something?

Great post though!

Aug 05, 2010 04:20 PM #9
Rainmaker
4,798,170
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Great information Jeff, I've saved this for future reference.

Aug 06, 2010 12:08 AM #10
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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

 

MARKITA... . my pleasure and thanks for stopping by. I wanted to leave a message on your reblog, but didn't see it as of yet.  But thanks..

TIM... . yes, I know, and I thank you.  I just didn't get a chance to even update my post. I didn't eat dinner until 10 pm last night.. lol  In regards to the public comments, FHA has the power to change that kind of stuff and will usually not put that up for public comment. But yes, we do agree about the change in seller concessions, reducing it to 3%.  I guess time will tell.  thanks

DREW... . sorry that it didn't come across clear in my post. If you look at the 5th box down, under rate, I state the actually penalty for this, but that I am not including the cash hit in the total costs. I have included it in the rate itself. And I stated this in letter A also.  But thanks for asking... when I get this detailed, sometimes it's not as clear because my eyes hurt from working on such a complex chart.  thanks and thanks for the compliment.

GABE.... .  thanks for the compliment.  Just a fyi.. some of this will be changing as of September 7th and I am writing about it now.  SHould be posting it in a few hours.  thanks

 

Aug 06, 2010 01:51 AM #11
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Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

I think leverage is a very good thing.  Home shoppers should always check out their options and leverage themselves with the least amount down with these phenomenal interest rates!

Aug 06, 2010 03:49 AM #12
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