Posts Tagged ‘FHA loan’

Is It Time to Refinance An FHA Mortgage?

October 11, 2019

As discussed previously, using an FHA loan to buy a home makes sense for home buyers with relatively low credit scores and limited down payment funds. FHA loans offer very attractive pricing for these home buyers.

Interest rates have now fallen to their lowest level in three years, so it may be time for current FHA mortgage holders to consider a conventional mortgage refinance. The interest rate savings may not be huge, but changing from FHA mortgage insurance to private mortgage insurance could bring significant financial benefits.

I’m working with a couple now (we’ll call them Jack and Diane) who bought their home in 2017.  At that time, their qualifying credit score was in the mid-600’s and they had just enough cash for the FHA minimum down payment.  This was an ideal scenario for an FHA mortgage.

Fast forward to 2019 – their credit scores have increased and home appreciation in their neighborhood has given them more equity.  A conventional loan now makes sense for their updated situation.  They can refinance to a new interest rate that is just 0.25% less than their current rate.  Normally such a small monthly savings, by itself, does not justify the cost of refinancing.

In addition to the interest rate savings, they will also save money every month with lower mortgage insurance payments.  Switching from their FHA loan to a conventional loan will lower the mortgage insurance monthly premiums by about $120.  Their total monthly savings equal $160, and their refinance has a break-even point of just over two years.  Considering the interest rate savings plus the mortgage insurance savings makes their refinance worthwhile.

An added benefit is that their new private mortgage insurance will cancel in a few years (unlike the FHA insurance which is permanent), increasing their monthly savings to about $200. So, Jack and Diane will realize this bonus savings in just a few years.

Ultimately, home buyers who used an FHA loan two or three years ago may reap big rewards from a conventional refinance now, assuming their property value has increased.

Ron moved into your neighborhood in the last three years or so. At the neighborhood Halloween party, ask Ron if he has heard of an FHA mortgage. If he replies, “Yes, that’s the type of loan I have,” ask him if he would like to lower his monthly payment.  Then connect Ron with me.  We will quickly determine whether moving to a conventional mortgage can help Ron financially.

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Millennial Home Ownership Survey

September 19, 2019

There are some interesting facts and observations in an August article documenting survey results from Millennial home buyers.  Here’s a link to the full study from lendedu.com.  1,000 people aged 23 to 38 participated in the survey.  Here are some survey results:

  • 58% of respondents say they own their own home.
  • 83% of these home owners obtained a mortgage to buy their home.
  • 75% of these mortgage holders obtained a FHA loan.
  • 16% is the average down payment percentage for the survey respondents.

To me, it is very surprising to me that such a high percentage of these home buyers used the FHA program, especially given the relatively high down payment percentage reported.  What I also find surprising is how the author treats FHA loans vis a vis the private mortgage insurance component of conventional mortgages.

Let’s look at the basics of FHA mortgage insurance (“MI”) vs. conventional (private) mortgage insurance (“PMI”).  FHA charges a 1.75% up-front MI.  On a $300,000 loan, that charge is $5,250.  Assuming a Millennial average 16% down payment, FHA charges a 0.80% monthly MI premium, which equals $200 per month.  And for this loan, the borrower must pay the monthly MI for 11 years.

For PMI on conventional loans, there is no up-front fee.  So our $300,000 mortgage holder is better off by $5,250 to start.  The PMI premium is based on the combination of down payment and the borrower’s credit score.  Let’s assume that a Millennial buyer (we’ll call her “Anna”) has a 680 credit score.  I calculate Anna’s monthly PMI premium at 0.26% or $65 per month.  In addition, the conventional loan PMI will cancel sooner than FHA MI, so Anna will pay conventional loan PMI for less than half the time she would pay FHA loan MI.

Summarizing this example, Anna with a 680 credit score would reap the following mortgage insurance benefits of choosing a conventional loan vs. FHA: (1) Anna saves $5,250 by not having the up-front FHA MI premium rolled into the loan amount; (2) Anna saves $135 per month with the lower PMI rate vs. the FHA MI rate; and (3) Anna stops making mortgage insurance payments way sooner.  And Anna’s PMI payment will be even lower if her credit score is in the 700’s.  From a mortgage insurance perspective, the conventional loan seems like a much better deal.

The author praises the use of FHA mortgages, then later makes the following statements about private mortgage insurance:

  • PMI should be avoided as it will usually cost the homeowner between 0.5% to 1% of the full mortgage amount….”
  • “…it is not great that so many are also paying for PMI as a result of less-than-optimal down payments…”

Such blanket negative statements about PMI concern me.  In our example, and many examples where the borrower has a strong credit score and can make a 10% or more down payment, the numbers often favor conventional loans.  FHA loans are often better when the borrower’s credit score is low or the borrower can only make a down payment of 10% or less.

The key lesson here is to consult a professional mortgage lender (I suggest that this guy for Georgia home buyers) to run the numbers for both FHA and conventional loans.  Then choose the best option given your circumstances.

Which Type of Mortgage To Use – Scenario 2

August 23, 2019

Now let’s change our buyer scenario. Both Jack and Diane want to make offers on a home, but this time they have 10% to put down. (Curious about a smaller down payment?  Take a look at the prior scenario with a 3.5% down payment.)  They still have the same qualifying credit scores of 680 for Jack and 795 for Diane.

With Jack’s 680 credit score, his monthly payment for a conventional loan (principal, interest, and mortgage insurance “MI”) would be $1,514.30. For a FHA loan, his payment would be $1,452.29. Given Jack’s credit score – even with the 10% down payment – FHA still delivers a better price, even though FHA loans have the draw backs of the up-front MI and the permanent monthly MI (assuming Congress does not change the law).

In this scenario with Jack’s 10% down payment, the mortgage insurance falls off after 11 years (even if Congress doesn’t act). Meaning, the FHA loan becomes even more attractive now and into the future.

With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,391.24. Her FHA loan payment would be $1,452.29. (Note that it is the same as Jack’s payment, even though Diane’s credit score is over 100 points better.) In this case, Diane can now save money by using the conventional loan. The conventional loan has the best pricing from the beginning, and it provides the PMI cancellation benefits mentioned in the previous post.

With this example, one can definitely see how FHA loans do not have the same impact when it comes to the interest rate, mortgage insurance, and monthly payment versus conventional loans. Even with such a large gap between the credit scores (680 versus 795), the payment on the FHA loan is the same.

Ultimately, every client situation is unique. For some borrower circumstances (e.g., self-employed, buying a condo, high debt to income ratio, etc.), we may recommend one loan option because the buyer has a better chance to win approval, even if the payment winds up being slightly higher.

Do you know someone planning to buy a home in Georgia?  If they have questions, connect them with me.  I love helping people understand their mortgage options and helping them determine the best approach to financing a home purchase.

Which Type of Mortgage To Use – Scenario 1

August 13, 2019

Now that everyone understands the basics of FHA and conventional loans, let’s do a buyer comparison. Both Jack and Diane want to purchase a $300,000 home. They both have $11,000 (3.7%) for the down payment and qualifying credit scores of 680 for Jack and 795 for Diane.

With Jack’s 680 credit score, his monthly payment for a conventional loan (principal, interest, and mortgage insurance “MI”) would be $1,820.82.  For a FHA loan, his payment would be $1,563.19. There’s no comparison. For Jack, the better deal is the FHA mortgage, even though it has the draw backs of the up-front mortgage insurance and the permanent monthly mortgage insurance payment.

With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,582.61. Her FHA loan payment would be $1,542.47.  In this case, Diane is also better off, at least initially, with the FHA loan. One thing to keep in mind is the MI premium. If Diane chooses the FHA loan, that premium is permanent (assuming Congress does not change the law). If she chooses the conventional loan, the insurance will eventually be cancelled, dropping her payment to $1,442. The key question for Diane is, “How long will you stay in the home?” If less than 5 years, Diane’s best bet is the FHA loan. If longer than 5 years, Diane may want to consider the conventional loan.

Notice the FHA payments for these examples. They differ by only about $21 even though the credit scores are drastically different (680 versus 795). This shows why FHA is better for those making a purchase with lower credit scores. The buyer doesn’t see as steep of an increase in their payment.

In the next blog post, we will make the same comparison with a 10% down payment.

Does your friend Scott talk about buying a house?  Does he understand which loan program is best for him?  If not, have Scott contact me. We Dunwoody Mortgage professionals understand the details of these mortgage programs, and we coach our buyers to make the best decision given their circumstances.  Often, with a slight change to their home purchase situation (change of down payment, paying down a credit card balance, etc.), we can help our clients save money with a better interest rate or a lower mortgage insurance cost.  Home buyers should consider all options before buying, and Dunwoody Mortgage offers the service and knowledge to help home buyers make the best decision possible.

Types of Mortgages – FHA

July 23, 2019

Given recent mortgage program changes, now is a good time to review the pros and cons of the major loan programs and when borrower circumstances favor one specific loan program.  In the last few years, many of our clients have used the conventional Home Ready program.   Without Home Ready, many of these buyers would have used FHA loans.  Given the Home Ready changes, we expect more future buyers to use FHA loans.

So let’s talk about FHA loans!

  • In the metro-Atlanta area, buyers can purchase homes up to about $390,000 using a minimum down payment (3.5%) FHA loan.  That is a lot of home!
  • Relative to conventional mortgages, FHA loans are generally more forgiving of credit “issues.”  This means lower credit score borrowers will most likely get a better FHA interest rate versus a conventional loan.
  • FHA allows for lower credit scores and shorter wait times following derogatory credit events, such as foreclosure or bankruptcy.  Borrowers typically need a 620 score to qualify.  Depending on other borrower details, Dunwoody Mortgage may be able to close loans where the borrower’s credit score is as low as 580.

Both FHA and conventional loans require monthly mortgage insurance “MI” for down payments less than 20%.  For FHA, the monthly premium is a flat 0.85% of the loan amount.  Conventional loans determine the premium based on the borrower’s credit score and down payment.  FHA loans also have an up-front mortgage insurance premium.  FHA monthly MI is permanent if the down payment is less than 10%.  Note that Congress is now considering a bill to automatically cancel FHA MI similar to how conventional loans cancel the insurance.  More to come on this story.

In the next post, we will review conventional loan details.  For now, if you know someone looking to buy a Georgia home, please refer them to me.  We Dunwoody Mortgage professionals understand the key loan program details and we coach our buyers to make the best decision given their circumstances.  We can help our clients find ways to lower interest and mortgage insurance costs.  We have a strong record full of very positive customer reviews.


The mysterious case of home ownership

July 9, 2019

Home buyers continue to make assumptions (most of which are bad) when it comes to buying a home. Meaning, the options for education for buying a home are not as good as they should be.

That is why you have The Mortgage Blog!

This misinformation is undoubtedly holding some back from even looking to try and purchase a home. Let’s take a look at a recent survey by Fannie Mae to see some of the false assumptions buyers have about purchasing a home:

  • most buyers assume the minimum credit score is higher than what is actually required to qualify
  • most buyers assume the down payment is higher than what is actually required as a minimum down payment
  • few home buyers are aware of low down payment programs such as Fannie Mae Home Ready requiring only 3% down

Under these assumptions, many potential buyers assume home ownership isn’t even an option and therefor do not do any further investigating into possibilities of buying a home.

The Mortgage Blog has covered all of these topics and more:

The Mortgage Blog has your back! Reading over these, one will learn a large down payment is not needed to buy a home (as little as 3% down on a conventional loan and 3.5% on an FHA loan), perfect credit is not required (down to 620 on FHA and conventional and sometimes as low as 580 on FHA), and there are programs out there for first time home buyers.

Been wanting to own a home but confused at all of the misinformation out there? Just want a straight answer or two? Contact me! I will be happy to answer your questions about home ownership. If you are looking to buy in the state of Georgia, I can get you prequalified and on your way to owning a home!

The Impact of Student Loans on Home Purchases

March 20, 2019


Homeownership among people aged 24 through 32 declined 9% between 2005 and 2014.  There are many factors contributing to this trend.  One, obviously, was the Great Recession.  With higher unemployment, people underemployed, and people laid off, those in the 24 – 32 age bracket (just coming out of college) found a difficult labor market.  This caused them to delay their home buying plans.  On top of this, the Federal Reserve recently reported that increasing student loan debt has also lowered home ownership in this age group.

Millennials now carry a collective $1.5 trillion in student loan debt.  A recent Bankrate.com study reports that 31% of millennials (aged 23 – 38) have delayed buying a home because of student loan debt.  According to the study, almost 75% of the survey respondents stated that they have delayed major life financial milestones such as getting married, having children, saving for retirement, creating an emergency fund, and buying a car.

Reading studies like this makes it sound as though student loans are preventing people from qualifying for a home loan  Don’t confuse the ability to qualify for a home purchase versus simply putting off buying a home.  They are not the same.  I’ve helped people purchase a home that suits their budget even with student loan debt hitting six figures.  A potential home buyer will make a housing payment.  If they plan to live in one area for several years and have a good job, why not make a mortgage payment and build wealth instead of paying rent?  Again, they will have a housing payment of some kind.


Here are some loan options that may allow people with student loan debt to buy a home now rather than waiting:

  • 3% down Home Ready and Home Possible mortgages.
  • 3.5% down FHA mortgages.
  • 0% down VA mortgages for military veterans.
  • 3% down conventional mortgages.

To me, the report’s most eye-opening statement is this:  77% of millennials with student loan debt would approach college differently if they could go back and change it.  The respondents stated that they would apply for more scholarships or enroll in less expensive universities or colleges.

Do you have a friend or family member who thinks they cannot buy a home due to their student loan debt?  If so, refer them to me.  I will analyze their income and debts relative to all loan programs and help them chart the fastest course to home ownership.  With the many loan programs available, they might be able to buy now.


Potential new rules for condos with FHA loans

March 12, 2019

While potential condo buyers aren’t on pins and needles waiting to hear from HUD like we would be for who wins an election, still, buyers would love to know the direction HUD will go with FHA loans and condos. Current loan guidelines for buying condos with FHA loans are tough. The condominium project must be pre-approved by HUD to use an FHA loan. Then during the loan process, the condo project is re-certified; meaning, the criteria needed to get pre-approved is double checked to make sure the condo is still within the guidelines for its pre-approval.

Basically, buying a condo with an FHA loan is a lot of work. The condo homeowner association (HOA) must go through the hoops to get the complex approved for an FHA loan. Most HOAs don’t want to deal with the burden. Then repeat the process for the loan itself – twice the work for the same payout. Hopefully this will change soon.

A proposal was made a few years ago to HUD that would open up the number of condo complexes eligible to use FHA loans. The loosening of guidelines would also reinstitute spot approvals (similar to what conventional loans do for condos). This makes buying condos WAY easier with FHA loans.

This change will benefit home buyers with average to below average credit making a smaller down payment. Currently, almost all condos are purchased using conventional loans. While someone can qualify for a conventional loan with a credit score of 620+, the mortgage rate and monthly private mortgage insurance rates (for loans with PMI) are significantly higher than an FHA loan. The difference is big – easily over a half a point higher in rate and almost double the monthly PMI (depending on the down payment being made). Home buyers with average to below average credit could be in a position soon to save a couple thousand dollars annually.

Seriously HUD…. What’s the latest?

Looking to buy a condo in Georgia? One program we could use instead of an FHA loan is the Fannie Mae HomeReady loan. This has some advantages over a normal conventional loan that helps those making a minimum down payment on a home purchase. Contact me today, and we’ll see if you qualify for HomeReady whether buying a condo or not.

Help With Down Payments

January 23, 2019


Restating the main theme from the prior post, people who want to buy homes do not need “great” credit scores or large down payments.  Home buyers can obtain mortgages with as little as 3.0% down.  What about those people who have not saved enough for the low down payment plus closing costs plus prepaid escrow?  Do they have any options to help cover their required cash to close?  The answer is, “YES!” Here are some options for cash-strapped buyers:

  • Request that the seller contribute cash at closing to help cover the closing costs and prepaid escrow.  Mortgage guidelines allow the seller to contribute specific percentages of the home sale price to cover transaction costs and escrow, but not the down payment.  If the buyer’s agent can negotiate that the seller helps cover these items, then it can be done within the guidelines.  The greater the down payment, the more the seller can contribute.
  • Borrow from an employer-sponsored retirement account.  In many cases, home buyers with 401K or other retirement accounts may be able to borrow against the account balance to help purchase a home.  These are loans – the home buyer signs paperwork agreeing to repay the retirement account.  Different retirement plan managers have different rules, so home buyers should check with their HR departments and retirement plan managers to determine their eligibility.  Buyers can use retirement funds to cover down payment, escrow and loan costs.

  • Obtain a cash gift from a blood relative.  Parents, grandparents, siblings, and other blood relatives are allowed to give cash to help home buyers.  “Give” is the key word because all parties must sign documents stating the funds are a gift and not a loan, so no repayment is expected.  A recent Wall Street Journal article notes that now more first time buyers obtain relative gifts to help buy their homes.  Buyers can use gift funds to cover down payment, escrow and loan costs.
  • Government down payment assistance programs.  These programs are available from many state, county, and city governments.  They often require home ownership education classes and other commitments from home buyers.  These assistance programs may have income requirements.

The good news here is that cash-strapped home buyers can obtain low down payment loans and many can use one of these options to help close their loan.  Do you know someone who wants to buy a Georgia home but has limited cash?  Connect them with me.  We at Dunwoody Mortgage will help them explore all available options to buy a home sooner rather than later.


Low Down Payment / Credit Score Mortgage Options

January 16, 2019


Joe Tyrrell, an executive with mortgage software company Ellie Mae, recently stated, “People still have the misunderstanding that they need a FICO score above 720 and more cash for a down payment, so they don’t apply for loans because they assume they’ll be denied.”  These would be borrowers are self-selecting themselves out of the home buying market based on false assumptions.  So let’s clear up some mortgage myths.

Firstly, borrowers do not a need “great” credit score to win mortgage approval.  Conventional loan guidelines allow credit scores down to 620.  FHA loan guidelines allow credit scores down to 580.  And now non-traditional loans exist that can approve borrowers with scores down to 500 and derogatory credit events (e.g., bankruptcy or foreclosure) in the last two years.  Note that the lower one’s credit score, the higher the interest rate the borrower will face.  But FHA interest rates for lower credit score borrowers are not ridiculously high relative to rates for higher credit score home buyers.


Secondly, winning loan approval does not require home buyers to break their proverbial piggy bank and make a large down payment.  Home buyers can obtain FHA loans with a minimum 3.5% down payment, and they can win conventional loan approval with a 3% down payment.  And if the home buyer qualifies, he / she could obtain a low-interest Home Ready or Home Possible loan with a 3% down payment.  Qualifying military veterans can secure 0% down payment VA loans.  Buyers in rural areas can receive 0% down USDA loans in approved counties.

What may confuse potential home buyers about down payments is the fact that conventional loans require a 20% down payment to avoid mortgage insurance.  But as long as the buyer can win loan approval with the added monthly mortgage insurance expense, the buyer can get their mortgage with a down payment of only 3%.  This 20% down payment myth  requirement is widely held.  Even some financial journalists hold this incorrect notion, as shown by this statement in a recent Wall Street Journal article, “While conventional mortgages can require buyers to put down as much as 20% of the purchase price up front, FHA buyers can pay as little as 3.5%.”  Regardless of what some journalists write, I can help home buyers win conventional loan approval with a down payment as low as 3%!!

Home buyers should remember that they will have to pay closing costs and prepaid escrow in addition to the down payment.  So buyers should plan to invest more cash than just the down payment at closing.  But buyers have options to help with their cash to close needs.  We will explore those options in the next post.

For now, do you have a friend or co-worker who wants to buy a house but is concerned about the down payment or credit score requirements?  Connect them with me and I will help them obtain the best mortgage for their financial situation and home needs.