FHA Loans and FHA Mortgages

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.