As many of us know in the real estate market, FHA loans are being used more than ever before. With the disappearance of the subprime market of 2 years ago and in several cases, that conventional loans can be more expensive, more FHA loans are being utilized. I just wanted to point out some basics, because I am still hearing some misleading information that makes me cringe from time to time.
FHA loans are more expensive than conventional loans. - FALSE
This one is always a favorite of mine. Right now, forget about the pricing hits on the credit scores when comparing the 2 types of loans. In reality, a lender can make a little more on the FHA loan because of the SRP’s, which are the service release premiums. This is basically what the investors on Wall Street are paying to buy the loan.
Why would a loan officer state that FHA mortgages are more expensive? Or the fees might seem higher?
Here are a few reasons why you might hear this…..
- It went through the rumor mill. If it came from a realtor, the consumer, or the loan officer, it just circulated and either was twisted information or someone didn’t know what they were talking about.
- Some people get the upfront mortgage insurance premiums confused with the general costs of the loan. If this is not explained correctly, it’s very easy to assume that FHA mortgages are more expensive.
- Here is a good reason…. because the loan officer wanted to make more money, since the borrower didn’t have perfect credit and or the credit scores were in the low 620’s. I have known loan officers in the past that gave higher rates and or fees, telling the borrower that they were being placed in a FHA B minus loan.
- One false rumor – FHA loans are said to have higher costs. This might take place if the lender or loan officer decides that they can capitalize on FHA mortgages. But in reality, no matter what company that I worked for, my costs were the same no matter if it was a FHA loan or a conventional loan. And as I mentioned, sometimes people included the upfront mortgage insurance and associated it with the costs. Now, this is an extra cost, but you need a very good loan officer to break down these costs and compare apples to apples. I have written a series on comparing FHA loans and conventional loans. I take into consideration the LTV (loan to value) and the borrower’s credit scores. (there will be 5 different blogs below, that will show you the differences between FHA loans and conventional loans.)
Other rumors out on the street?
- FHA loans now require a 3.5% down payment, not 3.0%. (this was announced in 9/08 and was effective January 1st, 2009.) Besides, back then, it was 2.25% as a down payment and .75% used for closing costs). I bring this up, because a friend of mine who is a loan officer in Florida was told in a class that it’s 3.0%. And keep this in mind, this was coming from an instructor.
- FHA loans aren’t just for First Time Homebuyers. You can use FHA loans over and over.
- You can have 2 FHA loans at once, but there are major requirements.
- Monthly Mortgage Insurance is not there for the life of the loan. It will fall off when you hit the 78% LTV mark. And if you put 20% or more down, the monthly mortgage insurance is only there for 5 years. On a conventional, this is called PMI, private mortgage insurance.
- FHA loans take longer to close !!! - This is 110% incorrect. They take just as long as a conventional loan. It comes down to how hard the deal itself is, and how good the loan officer and the mortgage company.
Article by Jeff Belonger
