The Dirt on FHA Mortgage Insurance (And Why You Should Be Glad to Pay)

By
Mortgage and Lending with Platinum Home Mortgage Company NMLS #238304

I often hear agents and buyers express shock and dismay when the real numbers that make up mortgage insurance for an FHA loan are finally on the table, down and dirty for everyone to see.

Risky, but I still paid to do it!What they should be doing is thanking their lucky stars there is still an FHA loan around to loan money at rates that are WAY TOO LOW for the RISK the loan carries.

In a market like ours (the San Francisco Bay Area) it is common for FHA buyers to buy $500,000 + houses with the standard 3.5% down.

The good news? 3.5% down on a $500,000 house is $17,500.

The bad news?

  1. $8443.75 in up front mortgage insurance added to the loan. 
  2. $502.60 added to each payment as monthly mortgage insurance.

Okay, do you say "OUCH"? Or do you say "YEAH, BABY, send me those disclosures. I'm buyin' a house!"

Going to stop right here and honestly admit that "OUCH" coupled with a look of pure disbelief is the norm. But there is a better way to think about paying mortgage insurance and that is to think about the ALTERNATIVES and the REASON for the insurance in the first place.

In lending, the riskier the loan, the higher the rate of interest a borrower must pay. We already KNOW that loans with only 3.5% down are as risky as heck.

Remember this formula: the lower the equity in the house, the greater the RISK the borrower will walk away (read strategic foreclosure waiting to happen).

Gosh, you think a few lenders have suffered defaults as a result of those 100% loans we used to do? Do you think the lender is also just a little bit nervous that if the house slips in value just the tinest bit the borrower would then be underwater? (security for the loan just vanished into thin air).

I will speculate that if there was no FHA, buyers without the full 20% downpayment would have these choices:

  1. Save up the 20% down. That would be $100,000 instead of the $17,500). Okay, that is an OUCH.
  2. Pay a MUCH higher interest rate. The rate for a loan with only 3.5% down would be astronomical to cover the RISK associated with it. You don't even want to THINK about that rate. Trust me.

Instead, the borrower pays mortgage insurance and gets a LOW LOW rate. He also gets many liberal underwriting "breaks" that non-FHA loans do not enjoy. 

Finally, the FHA buyer does not need to wait until he can accumulate $100,000 to buy a home (when rates could be far higher and houses much more expensive). He can buy right now at this intersection of low prices and low rates.

Remember that mortgage insurance is just like any other kind of insurance. Everyone must pay into a pool to spread and cover the risk. Those with the MOST RISK must pay the MOST INSURANCE. If there is NO INSURANCE then there will be no one willing to absorb the risk and the product simply disappears.

 Witten by Janet Guilbault, Mortgage Banker and FHA Loan Specialist in the San Francisco Bay Area 

 NMLS # 238304

 

Comments (9)

Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Great bottom-line explanation of the advantages to having FHA around to kick, Janet.  Nothing is perfect, to be sure.  But it's an option.  And an option that gets many buyers into the housing market when they would most likely never dip their toes into it any other way.  Big thumbs-up ... and glad to see you writing again ... missed you!

Gene

Aug 08, 2012 07:46 AM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Hi Gene! Missed you too. I so toally forgot how much fun it is to blog. Nice to be back.

Aug 08, 2012 08:13 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Janet - Parked.  Got to smoke a stick before I read this bit.  And how ironic was it that I just commented on Gene's post that I miss the good Mortgage Bloggers of the day.  And you're back? 

Aug 08, 2012 12:37 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

After subtracting approximately 15 minutes of my life in indulging in a cancer stick, I'm back.  When I see the second best blogger AR has ever seen on Mortgages pop up again after so long, I had to take a step back.  I won't discuss the best, but I do believe Belonger is still alive and well and living in Jersey ;)

Compelling and factual points you make on the skin game, Janet.  Cause that is what it is.  The math is there.  Personally, I'm not against low down payment programs to get a loan to buy a home ... I've always been more interested in reserves in any case.  Helps protect the financier and the fiancee. 

Your understanding of insurance, while not popular at times, is correct.  There's a pool.  And it keeps it affordable God Forbid something happens and you need to use it.  If it were totally individually based, utilizing insurance after having to use it would render it un-affordable.

Between Jennifer writing a post recently and seeing you writing this post, a bit of nostalgic magic may be back once again around here.  I'm nostalgic about having the best being all in.

 

Aug 08, 2012 01:02 PM
Janet Guilbault
Platinum Home Mortgage Company - Walnut Creek, CA
San Francisco Bay Area Direct Mortgage Lender

Okay now I have a confession. My idea of "catching up" was to go to your last blog. Then to Jennifer's. So I had already read both when you made this comment.

As always, that read left me full of questions and is not an accurate gage of anything on AR except it does mean something to me that you both are still here.

My idea has always been that every one has a creative outlet. You can only ignore if for so long. Then the urges start because you need a release.

I, like you, am an unlikely mortgage person. But compensated well because the ability to spew ideas, be creative, and never ever have writer's block. This is also what enables you to bewitch underwriters and develop stratagies that no one else can think of (or at least not as quickly as you).

Is it as fun as the freedom you get from being an artist? Well, hardly. Are you listening Jennifer?

PS Can you please not remind me of JB who called me pollyanna cotton candy fluff bunny??? (and worse when it was the middle of the night, right coast time.) I see him on FB but is he still here?

 

 

Aug 08, 2012 01:21 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Pollyanna Cotton Candy Fluff Bunny Janet - No, I can't stop reminding you.  In addition, I'm a proponent of artists being paid according to their ability to sell what they are expressing.  In that, I'll do as good if not better after eating a steak rather than ramen noodles.  Drinking the cheap beer and driving a cheap car will never change for me.  That written, welcome back.  I've got a case of Busch Light to open ...

Aug 08, 2012 01:30 PM
Jennifer Monroe
Compass - Charlotte, NC
Real Estate REALTOR®/Broker/Designer

Janet, the truth is that I saw this post first! I was just about to comment when Jason usurped my laptop for his own pointless endeavors ;)

I was thrilled to see you here and actually love this post. I am in agreement that the cost of this insurance is dirt cheap and buyers should thank their lucky stars it's available. If this were a free market product, most wouldn't even qualify, and those who did would pay through the nose.

And YES! I'm listening! Thanks to my very sweet friend Debe Maxwell, I am studying for my NC test as I write. I will be back in this game in no time!

SO glad to see you here!!

Aug 09, 2012 08:51 AM
Mike Young
203kOnLine.com, covering the USA - Las Vegas, NV
FHA 203k Consultant 916-758-1809

you all appear to know each other... lol, 

Aug 11, 2012 12:41 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

I have no idea what you write of, Mike ;)

Aug 13, 2012 01:47 PM