To FHA or Not To FHA…That
Is the Question
The other day a Realtor friend
of mine sent me a Purchase agreement and had marked the loan type as FHA. The borrower had a great credit history and
was putting down 10% of the purchase price.
I called my friend and asked him to change the loan type on the purchase
agreement from FHA to Conventional. At
this point my realtor friend asked me, “Why?
What’s the difference?” Well, as
my grandpa used to say, the difference is in the details.
FHA is a great program. Here are some of the Pro’s for using FHA:
·
FHA will lend money to borrowers with lower
credit scores, down to a 640.
·
FHA also has great interest rates, Below 4% last
week
·
FHA offers lower down payments, 3.5% of the
purchase price
·
FHA can be used with Indian Housing to subsidize
down payment (restrictions apply)
·
FHA has lower time restrictions on Bankruptcy and
Foreclosure, 2 and 3 years respectively
What’s the catch you ask? Ok, here is the Con: FHA Mortgage Insurance is higher. A lot higher.
Mortgage insurance is money that
borrowers pay into a pool to cover the losses incurred should their loan go
into default. For FHA the borrower will
have to pay 1.75% of the purchase price in up front mortgage insurance and
1.25% per month in mortgage insurance premium.
For example, let’s say a
borrower is buying a house for $100,000 and using an FHA loan. The down payment would be $3,500 (3.5%) and
the Base loan Amount would be $96,500.
The FHA Up Front Mortgage Insurance would be $96,500 x 1.75% or
$1,688.756. FHA will roll this into the
loan so you add the upfront mortgage insurance to the Base Loan Amount of
$96,500 to get a total loan amount of $98,188.75.
On top of this the borrower will
have to pay the monthly mortgage insurance premium of 1.25%, or $102.28. This amount must be paid every month for a
minimum of the first 5 years.
Compare this to Fannie Mae
(FNMA). For FNMA you need 5% down
payment. In the same scenario with a
purchase price of $100,000, that would be a $5,000 down payment and a $95,000
Loan Amount. There is no upfront
mortgage insurance with FNMA, only monthly.
The monthly mortgage insurance amount can vary, but I would expect it to
be around .96%. So the borrower would only
owe $59.37 per month. The monthly
mortgage insurance obligation can be dropped at any time once the borrower has
reached 80% loan To Value.
From the comparison it is easy
to see that FNMA is a better deal. So
why would you ever use FHA? There are
several reasons.
·
Credit- FNMA requires a minimum 680 credit
score. If you are below this you must
use FHA
·
Down payment- If you do not have 5% down payment
you must use FHA
·
Bankruptcy and Foreclosure- If you have had
either within the last 5 years you must use FHA
Those are the main reasons you
would use FHA. It is a great program if
you fall into one of those categories.
Sure the cost is a little higher for the borrower, but the risk is
higher for the lender. In the end it
evens out and makes home ownership a possibility for many people.
If you have questions about
either program, and how your scenario fits in, please call me at any time.
Jon Hayes,
NMLS#: 130501
Mortgage
Loan Originator
Hallmark
Home Mortgage
9000
Keystone Crossing, Suit 1050
Indianapolis,
Indiana 46240
Phone: 317-430-3105
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