Does Your Client Really Need an FHA Loan???

Mortgage and Lending with Bay to Bay Lending, LLC NMLS 343112

The demands on FHA spanning the past 5 years put into question the agency's sustainability of its loan program that insures mortgages.  To better its financial position the FHA increased its monthly mortgage insurance premium and then, as of this month, new FHA mortgagees will carry the monthly mortgage insurance premium for life.  Prior to this month FHA mortgagees could cancel their monthly MI once they had paid down below 78% of the original balance.  And it is costly to say the least.

On a $250,000 FHA loan, a borrower will pay $281.50 monthly, $3378 per year, or roughly $17,000 over 5 years.  Needless to say, FHA is doing all it can to steer people away and into the private mortgage insurance market.

With these recent increases - Private Mortgage Insurance is becoming more attractive.   In a sales transaction, the seller can pay the premium.  Or, the borrower can use lender paid mortgage insurance.

One of my lenders recently laid out a comparison between FHA and PMI using the following parameters

  • $200,000 Sales Price         
  • 5.5% Interest Rate
  • 30% Standard Agency Coverage
  • 30-Year Fixed-Rate Loan Term
  • 95% LTV
  • 680 FICO


As you can see, while the PMI option does carry a larger up front premium (often paid by the lender or seller) the monthly savings is to hard to ignore.  Please note that PMI carries credit score, LTV, and Debt Ratio requirements.  FHA is still a good vehicle for those high debt ratio lower credit score deals.

The point here is to ensure you are dealing with a lender who understands how product levers differ and PMI guidelines , and doesn't fall back on the crutch of FHA - which over time can cost thousands.  If your client has 3.5% down for FHA coming up with the additional 1.5% to go conventional with PMI is not to far of a stretch. 

Tony Marra is a Senior Mortgage Originator with Bay to Bay Lending in Tampa Florida.

He can be reached at 813-842-7999 or visit his web page at  or 

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