FHA Loans and FHA Mortgages

FHA loans have been the choice of mortgages as of lately in many parts of the country for numerous reasons. What I do 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 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 thought just because you had a conventional loan, that you had the better loan. This was not always true when putting zero percent down or 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 almost 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 10% 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 10% down.  

***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. It all comes down to the investor. We don't have penalties on any credit score above 580. And I can still do credit scores down to 500 with a manual underwrite. Many lenders can't go below 580.***

 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 would 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 $4,275 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. This is correct and I 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 $5,420.50 in payments in 5 years. This is a difference of $1,145.50 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 is lower, which would offset the interest that you would write off on the 6.625% 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 $4,275.

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. 

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

Mortgages and points, sounds like evil words. It could save you thousands. I have been doing this for almost 16 years now. When I first got into this industry, sure, I was green....brand new. Sure, I had classes in High School and College in regards to financing, economics, managing your money, and even some accounting classes. But what got me were the lawyers and the accountants that told their clients not to do mortgages with points associated to them. Or your next-door neighbor that got this great deal with zero points and that this was the way to go. Even the talk radio shows that might have been talking about one specific thing in regards to points and zero points, but that you came into the middle of the program. So who should you believe? Don't believe this next statement....  "points are suppose to mean that, we as loan officers, make more money."  This is not true.  Points are used to buy down the rate.  Now, there are many that abuse points to make more money, but this should not be the norm.

One of my first questions when speaking to a client, refinancing or purchasing, is what their goals are for the near future and their long-term. Now, many of us don't have these so-called crystal balls that many claim to have. Things can happen at any time. But I have a lot of passion in what I do and I care what I do, helping those clients to achieve their dreams. By giving the consumer options in what kinds of mortgage programs there are and the costs behind these programs, I can help them achieve this dream and their goals.

This scenario can sometimes be simple math and not the calculators online that tell you if you should refinance or even buy a house. These calculators are a formula made up by someones calculated guesses and certain factors included. I am not looking for the typical answers of; "I want Zero points" and "I want a no cost loan". Just because the client says that they want this type of loan, doesn't mean that it fits their needs.

I am going to use an example in regards to someone doing a mortgage of $300,000. Let's keep the example simple by stating the only closings costs will be zero points and with 2 points. I am not using credit scores or mortgage insurance.  Again, keeping this very simple.

Part 1

At this point, the difference of payment is $120.89 a month. The total points that you will be paying is $6,000. Basic math says that it would take you 49.63 months to recoup the points that you paid. That is less than 4.2 years, which means that your break even point on paper is 4.2 years. But let's take it one step further. Assume that you are in a 28% tax bracket for income tax purposes. You will be writing off $1,680 on your taxes the next year.  So if you subtracted the $1,680 from the $6,000, you actually paid $4,320 in points.  Now your break even point would be 35.73 months which would make that slightly less than 3 years. WOW..... So if you stayed in your house for more than 3 years, you are making money.

You need to consult your accountant on the different tax deductions when it comes to purchasing and refinancing. There is also a difference in how much you can write off depending on if you are purchasing a home or refinancing your home.

Part 2

Here is where so many lenders fail in educating the average client or where the client doesn't see the true savings. You also have the amortization of the loan.

If you kept the loan for 3 years (the break even point) at 6.375%, your principal balance would be $289,008. If you were paying 5.75% for those same 3 years, your principal balance would be $287,725. This is a difference of $1,283 savings by paying 2 pts to get your interest rate lower.

Summary :  Overall, in reality, your break even point would be less than 3 years, because of the amortization. It would almost be 2 years if you stayed in the house for 3 years. Talk about putting your money to good use. Another reason why sometimes putting less down and using that extra money for your rate would make more sense.

In closing:

Again, these are examples and not including other lender costs or even mortgage insurance depending on your down payment. This comparison is just for informational purposes in explaining how points and no points work. And yes, you would need that extra money to even buy the rate down. But you can also get it from the seller, in a seller's concession. This doesn't always apply to everyone because of the money issues. And it also comes down to your monthly and yearly goals, may it be short term or long term. But this is a good dissection of what your money can do for you and how it can work for you. And one of the old MYTHS of points is that the lender is making more money. This is not true at all, as long as your lender is comparing true apples to apples.

***These rates and points are an example from 05/21/2008 for a 30-day lock on a conventional loan with credit scores above 680 and no mortgage insurance. It all depends on your income and credit qualifications in order to get these rates.*** 

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 APR is 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.