Is FHA No Longer a Good Option?

Mortgage and Lending with imortgage

For years, I have touted the benefits of FHA over conventional. Lower monthly mortgage insurance, lower down payments, pain free and often FREE streamline refinances when rates drop and generally lower interest rates than conventional as well a few other positives. Heck, it was almost impossible to find conventional financing with less than 10-20% down for quite some time making FHA the number one way to go even for those who weren't first timers.

As of late, The FHA seems to have pushed buyers from their clutches to other financing methods. In the last year, the FHA has raised their monthly mortgage insurance rates twice, more than doubling the premium and increasing payments for those who have historically looked to FHA for just the opposite. This has also had a negative impact on those with FHA insured loans wishing to refinance in to lower rates to save money. Even if current rates are upwards of a full percent lower than their rate, the increased MI almost certainly removes any benefit from refinancing their loan.

First time home buyers frequently use FHA because of it's low down payment requirement, more relaxed guidelines and lower overall payment. With payments now higher by over $60 per month on average since the first increase last year, these buyers no longer qualify for as much as they once did. Conventional now has options that compete with and even beat FHA!

More and more buyers are now turning back to conventional financing with the return of the 3% down loan. The down payment is now LOWER than FHA, the monthly mortgage insurance is also actually lower if you split the MI the way FHA does and there's less to worry about when it comes to the property condition. In addition, conventional financing allows for a spouse to purchase a home without pulling the non purchasing spouse's credit or hitting the purchasing spouse with their debt, or being concerned with any adverse credit the non purchasing spouse may have.

That's not to say that FHA doesn't still have its place in the market. For those with less than perfect credit and low credit scores, FHA financing can actually still save the buyer money over conventional financing because there aren't the same pricing hits that conventional has which increase buyer's rates and or closing costs. Fannie Mae and Freddie Mac have seen to it that there is a charge for everything under the sun, especially for credit scores and down payments as you will see in the links provided. 

Understanding the buyer's goals and current situation will help provide a clear direction for which financing is most beneficial. I use FHA much less now than I have over the past 5 years now that requirements are loosening a bit here and there between Fannie and MI companies. Question is, will 20% become mandatory with conventional financing which will shift most buyers back to FHA as their only means of financing a home? How many people actually have 20% for a down payment and should it once again become the minimum?

I have my own opinions about having "skin in the game" and how much of an impact it had on recent and has on continuing events, but regardless I'm pretty sure if our government continues restrict the ability of the average American to own a home, it will crush any hope of the recovery we so desparately still need. There are millions of jobs across our country which rely on the real estate market; is this really the time to make it even more difficult to buy a home?


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Brian West
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