FHA Loans and FHA Mortgages

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.