FHA Loans and FHA Mortgages

FHA loans have been used 30% more as the choice of mortgages as of lately in many parts of the country. What I hate hearing is that they have taken the spot of the subprime loans. This is not true by any part of the imagination. This statement is from those that are inexperienced in both the mortgage industry and the real estate industry. The realization has been that 30% of the subprime mortgages in the last 5 years previous to the last 1 1/2 years should have been FHA mortgages, not subprime.

The subprime loan for many years could go down to a 500 credit score, as long as you had more money down. But your rate was usually higher. The better your score, the less you needed to put down, the lower your rate. Sounds good, right?  Wrong, because the subprime rate was always higher than the FHA rates.

To compound this, so many said just because you had a conventional loan, that you had the better loan. This was not always true when putting 3 percent down. In most cases, you were told this, because that particular lender was not FHA approved. Now?  Even with 10% down and credit scores less than 680, FHA loans in most cases, will be the best mortgage for you.

Okay, you could argue the fact that this is just my opinion. True, even though I have over 16 years of experience as a loan officer in the mortgage industry. But numbers don’t lie. Let me show you…..

The example below is based on a $300,000 purchase price with 5% down. One reason why conventional rates are a little higher in this scenario as in FHA rates is because Fannie Mae and Freddie Mac have added penalties per se. 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 659, which is above the average credit score and I will still show in this example that FHA loans are cheaper, even with 5% down.  

***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. And many lenders can’t do FHA loans under 580. I can still do credit scores down to 530 with a manual underwrite.***

Disclaimer :  These rates are based on today’s rates for a 30 year mortgage and can change any time because of various market conditions. To compare this scenario apples to apples, the fees are the same and with zero points. The conventional rate also includes the penalty for the 659 credit score.

Some of you might be saying that you will be adding $4,897.00 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. This is correct and I don’t 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 $12,807.00 in payments in 5 years. This is a difference of $7,910 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 because your interest rate is lower, which would offset the interest that you would write off on the 7.125% rate. Just something else to remember, but consult your tax consultant or CPA. 

FYI –  If you sold your house in less than 3 years, you are entitled to a refund of the upfront mortgage insurance premium (UFMIP) of $4,897.

How dto I find an FHA approved lender?    You want to make sure who you are dealing with is FHA approved.

Why do I say this?  Not all lenders are approved FHA and some may tell you that you don’t qualify FHA because in reality, they aren’t FHA approved. Another reason might be is because a conventional or subprime loan would be easier than a FHA mortgage.

You can find a HUD approved lender in your area by going to the following HUD website: http://www.hud.gov/ll/code/llplcrit.html     DISCLOSURE (just be careful of the spelling of the lender. If I put in my company’s full name, Infinity Home Mortgage Company, Inc, it tells me that there is no such company. If I put in Infinity Home Mortgage, it shows my company as being FHA approved. Just keep this in mind. You can always call HUD also. (202) 708-1112

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  …… my rate is locked, but rates came down.

      ……. my rate is locked, but rates came down who?

          …….. But rates came down, so I want the lowest rate now.

With the volatile market and rates dropping by more than 1/4% to 1/2% in the last 10 days, people want the lowest rates. And this is even after they locked into their rate 15 days ago. What makes it difficult in today’s market is that this is not always easily achieved. Why? Because the point of locking in is to be safe. Also, brokers in many cases will advertise or make promises that if rates come down, that they will give you the lower rate. A broker can usually get away with this, or hence make the promise. Their relationship with the investor is sometimes not important. As a mortgage banker, we can’t do this as often. More on this….

I am your loan officer and I take your mortgage application. At that point, I advise you that you can lock in at the time of application, all the way up to 5 days prior to settlement.  You then ask me for my advice. I say, to be honest, this is more difficult in today’s market than it was 5 years ago or even back in the mid to late 90’s. Yes, I have a service or two that helps me with these decisions, but they aren’t always on the mark either. Hence why those that make it sound very easy or tell you that they will give you the lowest rate, even after you lock in, are in many cases just a sales person wanting your business.

You lock in for a reason, to give you security. You take risk off the table at that point. Let me throw this out to you. You lock into a rate, but if they go lower, you want the lowest rate. What happens if rates went up?  Couldn’t I just do the same and raise your rate?

Let’s face it, mortgage rates have been up and down in the last 6 months. And in some cases, we have seen rates at one point climb a 1/2 percent in one week and in a few other cases, come down a 1/2 percent. Right now, the mortgage market for rates is the best it’s been in 8 months. But a great example is that the rates have gone up about a 1/4% in rate just in the last 38 hours. Most people only hear the news that rates came down and this news can linger for weeks, even if the market turned for the worst. Two reasons why :

  –  The media – They usually only report good news & that rates came down.

  –  The loan officer or lender - You will see advertisements for lower rates, and those advertisements will stay out there for weeks, even rates go up. They want the phones to ring.

Overall…. speak to a mortgage professional that will not only give you good advice, one who will educate you on how rate locks work, without misleading you, but someone that will be upfront and not a sales person. And another thing to watch for, which you usually don’t know until it happens at settlement.  If a loan officer changes your rate and or fees for the worst at settlement and they won’t budge, don’t sign the paperwork. I had a client that was told that they could make some corrections after settlement. Once you close and the loan is funded at the table, it’s a done deal. And this is for purchase transactions only. On refinances, you have 3 days to say no. In any case, give me a call, because I am able to do things quickly, if it was an emergency, based on what was mentioned above.  I also bring this up, because I currently have a client that keeps asking me if I will honor his rate that I locked in last week. To send him more proof. The only two pieces of proof that I can give him is the initial rate lock form that he signed and the commitment letter that will have the rate lock information on it. Why does he keep questioning me?  Because his sister went through this about 8 months ago and the lender changed the rate on them at settlement. Yes, it happens.  But I am in this business for another 15 to 20 years. Baiting and switching a client would not get me referrals. And also because I want repeat clients. Do you think any of this would happen if I changed someones rates and or fees at the end?????

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Well, maybe your voice has been heard.  Maybe it was the shot heard around the world. As news broke earlier today, in which there has been speculation that bill HR 3221, the “Housing and Economic Recovery Act of 2008, would be overturned, bill HR 6694 made strides today. 

There are good signs stating that the down payment assistance programs, such as Nehemiah, AmeriDream, Genesis, and so many others, will be voted back in. It’s not a done deal as of yet, but with the strong support from Congressman Barney Frank, who is the chairman of the House Financial Services Committee, has some promises on the table.  One such promise on the table is that HR 6694 would allow all borrowers with credit scores 680 and above, to be able to use the seller-funded DPA programs.  This is a huge start and a lot of this is from the support from people like you and I.

 This kind of news won’t keep me from taking back Down Payment Assistance Programs in Washington D.C. tomorrow afternoon. We still need everyone’s support, to make the Senate aware of the ramifications of eliminating such down payment assistance programs. 

Such elimination, in my opinion,  would put another severe strain on the already strained housing market. And it could add a ripple affect to those houses on the market, adding more days not sold. If you think about it, if you are moving up, someone needs to buy your home and that is usually a first time homebuyer. 

Conclusion :Some other things that HUD supports as a compromise to bill HR 6694 are :

  –  Borrowers with credit scores from 620 to 680 could be subject to higher insurance premiums. (I personally wouldn’t have a problem with this)

  –  Borrowers with credit scores below 620 would be banned from using the down payment assistance program until mid 2009. ( I truly think that we could improve on this one. First off, why down to 620?  Secondly, even people with credit scores of 570 or such can still have decent credit, under FHA’s credit guidelines.

For more on this story, you can read about it here, at Inman News. http://www.inman.com/news/2008/09/10/congress-weighs-reprieve-seller-funded-gifts

UPDATE as of 9/14 -   Mr. Belonger goes to Washington DC.

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