FHA Loans and FHA Mortgages

How many of you at one time or another bought a house or refinanced your mortgage and ran into one problem or another. May it have been the realtor who was not able to give you the correct answer or the loan officer who strung you along and then changed things last minute. I have never said that I am perfect or that I know it all, but it does come down to honesty, integrity, knowledge, and very good service. 

What about you first time homebuyers that have never experienced buying a home or refinancing for the first time. I truly believe that there are some key phrases that can sometimes be cause for concern, known as Red Flags. And just because you have done this before, does not mean that it will not happen to you. If you hear some of what is mentioned below more than once, especially in a short time period, this could be your warning.

The General / Basic Red Flags from both the loan officer or the realtor :

As you shopped for a realtor or a loan officer, this person was always getting back to you. Now you have signed a listing agreement, a buyers agreement, or the loan application and they do not get back to you right away. 

  --  If you are leaving a few messages per day, both e-mail or by cell, and this continues for close to 48 hours, there is no excuse. This is a huge Red Flag if this takes place a few days prior to settlement / closing, especially the day of closing, if they cannot be reached at all.

  --  Key words or phrases used often when first speaking to you ; 'I promise', 'I guarantee', 'no problem, Ill fix it', 'I am the best', 'I am the cheapest', and 'I have the lowest fees'. I am sure there are more.

  --  Delayed phone calls. I promise to call later or tomorrow. But you do not hear back from them and now you have to track them down. Yes, again, things happen. But if this seems to be a reoccurring issue, then you might have problems.

  --  Deadlines - If there are certain dates on the contract or with the lender, get everything in as soon as possible. If that is ordering inspections in a timely manner or getting documents to the lender, do not wait.

Red Flags from loan officers or lenders :

You are shopping for lenders and the loan officer never offers you a Good Faith Estimate. Rut row. They don't offer you the rate or the payment?  This might sound silly, but I had 3 clients just in one month, that this happened to them. Yes, can I judge and say that they should have asked?  But maybe the loan officer talked circles around that client, and then they just forgot. Sometimes just hearing, 'you are qualified' or 'you are approved', gets you excited, hence why you might forget to ask the important questions.

  --  You find a loan officer because their rates were very good. But since you have so much on your mind, they never go over the rate lock-in features of that program. If they do not cover this prior to application, and especially during application, this could be trouble. Or they get you to sign a rate lock form, but they convince you to float. Question, did that rate even ever exist then? 

  --  You might qualify for a FHA or VA loan, but tell you that you do not want those kinds of loans, because conventional is better for you.  This has happened to at least 5 people that I know of. The main reason was because the lender was not FHA or VA approved.

  --  If your lender/loan officer changes rates or fees during the process or at settlement, do not just give in. Avoid excuses such as; 'your credit score dropped', 'you have less income', 'your credit is not as good', etc, etc. What I am about to say is the average. These things are usually found out in the first week when processing a loan, not last minute.

  --  Changing stories / shifting blame.  This one can be used in conjunction with the other red flags mentioned above.

  --  When comparing good faith estimates, do not just compare the bottom line, 'total costs to borrower'. Some loan officers low ball certain 3rd party fees to make their good faith look cheaper. Or they escrow less taxes on paper that is mandatory in each state.

  --  You are at closing and the loan officer says, 'do not worry about those docs, we can correct that later'. NO !!! Once you sign, its over.

  --  If you have a credit score of 679 or less and less than 20% down and you know you should be going FHA, but the lender says that going the conventional way is better¦.  major red flag. It is been proven that going FHA in this scenario is cheaper monthly. Please read this for proof : FHA loans and FHA rates - Why can they be better than conventional loans¦¦

Red Flags from realtors or real estate offices :

When an agent only shows their listings. If you want to see homes and they keep showing those only listed by their company or that they are selling themselves.

  --  One complaint - When a realtor has a full time job that is not real estate related. I heard a story that the buyers had to wait until their realtor got up to show them the house. This was at 1 pm.

Red Flags from consumers :

This is actually to the consumer reading this. Never hesitate to tell your loan officer or realtor everything. Even if they do not ask you and you think its pertinent to the transaction. Don not take that chance in not telling them. We are all here to help you and not pass judgment. The true professional acts in this manner.

  --  Be loyal and just do not hop to every realtor showing houses. Build a rapport  with that person. That is if  you feel comfortable with that person. 

  --  The same with a loan officer. If you feel that they have given you the most information, have educated you 110%, have been prompt in their follow up and or responses, then don't always go with that loan officer that is cheapest on paper, Believe it or not, the best price does not always come with the best service. And in either case, it could cost you more in the long run.

Overall, do not keep falling for the same excuses over and over. Or, for multiple excuses during the process. Yes, things happen, but 9 out of 10 times, not that many on one transaction. These types of excuses are usually to delay you in finding out the truth, until it is too late. If anything above happens for 2 or more days in a row, do not wait, contact their manager or boss. If you do not feel like you are getting anywhere at any time, seek a professional in the particular field or possibly seek legal advice. It is one thing to give someone the benefit of the doubt, it is another to be lied to or misled intentionally. Never hesitate to ask questions.

Shop mortgage rates…  Shop APR (Annual Percentage Rate)…..  Shop mortgage fees….. So which is it?  Shopping for a mortgage can be very confusing to say the least. I hear so many called experts tell the average consumer to shop APR. This is not the wisest of decisions and can be argued by many professionals.

Lets add some more confusion. Most of us know what the rate is in regards to mortgages. Lets define rate and APR.  Rate :  A charge or payment calculated in relation to a particular sum or quantity: interest rates. (from answer.com)  APR (Annual Percentage Rate) :  Is the cost of your credit expressed as an annual rate. This is a federally required formula, designed to help the borrower compare the cost of credit. The APR rate is different from the note rate of your mortgage and is usually higher than the note rate. Why is this?

The APR rate is usually different than the mortgage rate because the APR includes certain fees which are calculated into the actual rate. The problem with this is that so many people tell you to use the APR as your measuring tool when shopping with other lenders. And each lender by law is suppose to send you a Truth in Lending disclosure which shows you the APR. Ill be breaking down what a Truth in Lending disclosure is in another post.

So why does comparing one companies APR with another can be misleading or incorrect?  Because the lender is suppose to include certain fees in this calculation. Not only do some companies leave some of these fees out, but there are other fees that dont have to be included that some lenders might include and the rules are not clearly defined. Sound confusing? Yes and I will talk about this later.

So, what fees are included in the APR?

These fees are generally included :

  —  Points — both origination and discount

  —  Underwriting, loan processing, and document prep fees (these are generally true junk fees)

  —  commitment fee

  —  attorney or title closing fees

 — PMI (private mortgage insurance) or MIP for FHA (Mortgage insurance premium) financed

  —  Prepaid interest - Interest that is paid from the time that you close to the end of the month. The problem here is that some lenders put 1 day or 5 days down on your good faith estimate. Even if they dont know your closing date.

Sometimes included :

  —  Application fee

  —  Tax related service fee

Generally not included :

  —  Appraisal fee

  —  Credit report fee

  —  Title fee

  —  Recording fees

Conclusion : The overall function of the APRis to measure the ‘true cost of the loan. Its suppose to create fairness and a level playing field amongst other lenders. Getting back to why I think comparing APRs from different companies is a bad idea. As mentioned, some lenders dont know how to compute the APR. Others leave out certain fees that should be included. Lastly, many lenders use programs that help compute the APR and it doesnt matter if you are applying for a FHA loan or a conventional loan. Not all of these APR programs are the same. Blame this on the government for not making it all the same.  

My opinion?  Use the TIL (Truth in Lending disclosure) as a helpful tool to ask questions why it might be higher or lower than another companies disclosure. But go back to the good faith estimate as your real tool. Why? Because all fees are supposed to be shown on this form. I would compare rate, term, and fees and here is a good example of this. Shopping Good Faith Estimates.  (FYI - compare the same programs)    Just one word of advice, not every loan officer will be truthful when it comes to the good faith estimate. Some lenders will not show all costs or confuse you by mixing up the different costs. *** And remember this, most of the costs are 3rd party charges which are estimates. You need to decipher what these are in order to shop accurately. Finding a trusted mortgage consultant is very important.

The Good Faith Estimate is an over abused term and can be misleading. If you speak to a loan officer that quotes you a mortgage rate, they should be able to give you a good faith estimate in less than 24 hours. If they dont, this is a major red flag. If the loan officer qualifies you for a mortgage, no matter if its a FHA loan or a conventional loan, you should receive one in less than 4 hours. There is no excuse or ryhme of reason. Sure, things happen, but just being busy is not good enough. Unless they specifically tell you that they will give it to you the next day because they are busy. This can happen, but other than that, if they dont communicate this with you, no excuse. And this could be indicative to how your loan process will go.

So, what is a good faith estimate? Its an estimate of all your costs associated with buying or refinancing your home. But here is the catch. There are some costs that are known costs and not just estimates. These would be the lenders fees. These are all fees that are under lines 801 to 820.

I just had a client recently compare my good faith estimatewith that of another lender. My title charges were about $500 more in costs. But I knew my estimate was alot closer because all title companies basically charge the same amount. The lesson to learn here? Dont always shop the total fees at the end of the good faith estimate. Please read below.

Three things that you want to look for when you first look at your GFE.

  '  Look at the loan program and make sure this is the program that you want. If it was an adjustable, it would say differently.  (Yellow highlight '  Upper right hand corner)

  '  Look at the mortgage rate. Make sure this is what you discussed when speaking to your loan officer. (Up top, middle of page, yellow highlight)

  '  The 3rd issue are the fees. As I mentioned above, everything in section 801 to 815 would be the lenders fees or anything the lender is going to charge you. (left hand column with 10 to 15 highlighted items) Dont ever be fooled if one lenders fee is higher than the other. You still need to compare the mortgage rate.

(Speak to your tax accountant to make sure what can be written off and what cant. But typically just the points can be written off)

What not to do when comparing good faith estimates.

  '  Dont compare total fees at bottom of the GFE, which I will explain why below.

  '  Just dont compare the APR of the loan. (explain below in a link)

Conclusion:  Again, dont always shop and ask for total fees. Compare the lenders fees the most. In regards to your escrows, each state is different. Your property taxes are paid either quarterly, twice a year, or once a year. I have seen some loan officers sometimes not show enough for your escrows in regards to the property taxes.  Its very easy for a loan officer to say at closing, 'these arent my fees, so all I can do is give an estimate.  Word of advice, yes, its an estimate. But if they have been doing this for sometime, they should have a good idea of these other fees. Also, if they dont know, they should be asking the title company or someone else. Lastly, just be careful, because some of these figures are not worth the paper that they are written on. Its just that, an estimate based on good faith. Make sure that you always speak with a Mortgage Professional.  And dont shop yourself right out of the market.

Lastly, if you have 3 good faith estimates in front of you, always go back to the person that you had the best feeling with, that you are comfortable the most with, and share the other 2 with them. Just dont run to the person with the best rate and or fees. I always like my clients to come back to me no matter what. I might be able to point something out to them. And this topic must be discussed when receiving a GFE, otherwise this GFE doesnt mean squat.  Locking or floating my mortgage rate !!!!

With the ever changing market, many are stating that FHA loans are the next subprime loans.  This is a big fat no. Many that make this statement are usually new in the mortgage industry and dont really know much about FHA loans. One main reason is because sometimes there is more work involved when approving someone for a FHA mortgage. Another reason is because the actual mortgage company is not FHA approved, because it costs money. So, with that said, does your loan officer always have your best interest at hand?  Even if they say they do?

Lets look at this a little further. For the most part, FHA rates were almost exactly the same as convnetional rates, up until about 6 months ago. Fannie Mae and Freddie Mac, which are the two companies that dictate the rules and guidelines, changed the penalties for lower fico scores. Okay, you say, how low. Well, not that low. Anything under a credit score of 680, there is now a penalty on conventional loans. And there would be certain incraments to fees, which meant the lower the score, the more of a hit to rates. Yes, FHA has begun the same, but these penalties dont usually start until you go below a credit score of 580. At least with my company, Infinity Home Mortgage. Many lenders out there start at anything below 620.

The example below is based on a $300,000 purchase price with 5% down. Here is the genral rule for penalties on conventional rates. If you are putting down less than 30% and your credit score is less than 680, certain fee penalties would apply to you, which would increase your rate.  The FICO (credit score) that I am going to use is 640, which is above average credit and will still show in this example that FHA loans are cheaper, even with 5% down.   

Disclaimer :  These rates are just an example of this weeks mortgage rates and can change because of various market conditions and are based on a 30 year fixed rate. The fees would be the same and with 1 point, so as to compare this scenario apples to apples. The conventional rate also includes the penalty for the 640 credit score.

Summary :  Some of you might be saying that you will be adding $4,275 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. This is correct and I dont want to confuse you with more numbers and charts. But here is a quick breakdown. If you kept your house for 5 years, which most people sell in a 6 year period, you would have saved $16,368 in payments in 5 years. This is a difference of $12,093 that you have saved!!!  And one other thing that is very small, but still makes a difference. You will be subtracting a few more dollars per month from your principal balance because your interest rate is lower. Just something else to remember.

Words of advice :  Seek a mortgage professional that completely understands the true differences between FHA loans and conventional loans. In the long run, it could save you thousands of dollars. Shopping for rate and program is not always the best advice.  Shopping for a mortgage professional might be the best advice.