Posts Tagged ‘FHA loans’

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.

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.

More potential changes to FHA loans

August 6, 2019

I’ve thrown up a posts over the past couple of months (here and here) about potential changes for condo purchases using FHA loans. How about a change on FHA loans that is beneficial for everyone!

A new bill working its way through Congress would make mortgage insurance for FHA more like mortgage insurance for conventional loans.

Currently, FHA mortgage insurance is permanent unless the buyer makes a 10% down payment. When making a down payment as large as 10%, often buyers use a conventional loan. Maybe there is a case where someone still wants to do an FHA loan (for example, a foreclosure 3 years ago is OK on FHA loans but not OK for conventional loans), but often 10% down means a buyer is using a conventional loan for their purchase.

With FHA’s current permanent monthly mortgage insurance, it makes FHA loans much less competitive with conventional loans. The new bill looks to change this situation.

If passed, the bill would change the cancellation date on FHA mortgage insurance from “until the loan is paid in full” (meaning permanent for the life of the loan) to when the loan balance is 78% of the homes original value. Meaning, the mortgage insurance is no longer permanent.

The current set up with mortgage insurance on FHA loans really isn’t fair to the home buyer. They are way over charged paying mortgage insurance for the life of the loan, and the change could make FHA loans are more viable alternative for buyers making the minimum down payment on a home purchase.

Can’t decide if an FHA is right for you? Contact me and we’ll find out! If you are buying a home in the state of Georgia, I can also get you prequalified and ready to make an offer on your new home.

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.


FHA still looking to revise condo guidelines

June 13, 2019

A post earlier this year on The Mortgage Blog detailed some of the potential changes coming from the Federal Housing Administration for using FHA loans when purchasing condos. As with most things involving the government, they still haven’t finalized the details, but the final product is coming more into focus.

The FHA Commissioner stated the agency is currently working to revise its condominium approval rules and that he expects a final rule to be announced soon. These changes on condos are paramount has he called condos a “mainstay of affordable housing” for seniors citizens and first-time buyers.

With that in mind, here are some of the proposed changes:

  • allow owner-occupancy determinations on a case-by-case basis.
  • allow up to 45% of commercial space in a building without documentation.
  • increase the approval period from two years to five years (this would be amazing since condo complexes are seemingly always in a “get approved with FHA mode” since they only last two years).
  • still the possibility of allowing for spot approvals.

The goal for FHA loans and condos is the become more flexible, less prescriptive and more reflective of the current market than existing guidelines.

While these changes will be welcome, it is hard to get too excited. The FHA issued proposed changes to its condo rules in 2016 that promised to lift a number of restrictions and streamline the certification process, but it has yet to issue a final rule. 

If these can go into effect, it would be perfect for buyers with lower down payments and/or below average credit scores. While one can qualify to buy condo with 3% down using a conventional loan, the rate for someone with below average credit scores is 1% or more higher than doing an FHA loan. This would make condos more affordable to more buyers.

Looking to buy a condo around the Atlanta BeltLine? Maybe a live/work/play area with condos over businesses? Or perhaps just a good old fashioned high rise condo complex? If you are looking to buy a condo in Georgia, contact me today. We’ll get you ready to move into your new home in no time at all!

Making dreams reality

April 9, 2019

A recent Bankrate.com study showed a majority of Americans still consider owning a home part of the American dream. The survey found close to 80% of respondents chose this as the number one indicator of achieving the American dream. This comes in ahead of other goals such as achieving retirement, having a successful career, and owning a car. If owning a home is still a goal, how do we achieve the goal of home ownership? Here are some steps to consider.

#1. Plan Ahead – whether one is self employed or in a salaried job, planning ahead is key. This way one will know options to consider and obstacles to avoid.

#2. Apply Early – getting prequalified is one option, but being pre-underwritten is a better option. In this seller’s market, being able to make an offer stating the loan is approved pending an appraisal and clear title helps the offer stand out in a crowded playing field.

#3. Know your loan programs – Sure, most of us have heard of conventional loans or FHA loans. Do we know the details of them? For example:

  • One could have below average credit and yet still get a great rate and a small down payment option using an FHA loan.
  • Conventional loans normally require a first time home buyer in order to get a 3% down loan, but that isn’t always the case. The Home Ready and Home Possible programs allow for anyone to use the 3% down payment option.
  • For current home owners, qualifying to buy a new home without selling a current home isn’t as difficult as one may imagine.

With these three items in mind, you can be ready to move quickly when the property you want becomes available. And you better be ready as good homes move fast in this market.

You could check out other posts in this blog where we talk about housing inventory levels (or the lack of inventory), qualifying with student loans, low down payment options, low credit score options, buying without selling, recasting…. OR you could give me a call to discuss further. If you are buying a home in the great state of Georgia, a 15 minute phone call and can you prequalified and well on your way to homeownership.

What are you waiting for? Being able to achieve the dream of home ownership is within your grasp!

 

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.

My (FHA Loan) Christmas Wish List

December 19, 2017

FHA loans are great for certain borrowers.  I look to FHA loans when my clients have credit scores of say 680 or less, little available cash for a down payment, and want a 30 year mortgage.  FHA loans also can help a home buyer who has a higher level of other outstanding debt, as FHA guidelines allow slightly higher debt to income ratios.

FHA loans typically offer lower interest rates than conventional loans, but they do have some limitations.  But now there is some movement in Washington to change some of these limitations.  Let’s pretend that the federal government is Santa Claus.  Here’s my FHA mortgage wish list:

  • Rep. Maxine Waters, D-Calif has introduced the Making FHA More Affordable Act.  This bill would repeal the “life of the loan requirement” for FHA mortgage insurance.  Right now, if a borrower closes an FHA loan with a less than 10% down payment, the mortgage insurance is permanent – it never goes away.  In contrast, the mortgage insurance is cancelled automatically on a conventional (non-FHA) mortgage when the outstanding principal balance reaches 78% of the home’s original value.  In my opinion, this would be a good change for consumers who need FHA financing.  I don’t think they should have to pay the mortgage insurance after they have 22% equity in their home.
  • Under Ben Carson, the federal Department of Housing and Urban Development (HUD) issued a report signaling an easing in FHA requirements for condominiums.  Currently, to close a FHA loan on a condo, the condo complex must be on the FHA approved list.  Condos apply for FHA approval based on a number of FHA-specified criteria.  If the complex is not on the FHA approved list, a buyer cannot obtain a FHA loan and must obtain conventional financing.  The National Association of Realtors reported that of the 614,000 condo sales in 2016, only 4% were closed with FHA financing. 
  • In addition to loosening FHA condo complex approval guidelines, the administration is also indicating that it wants to revive FHA’s “spot loan” program.  This program allows homebuyers to purchase a  condo in a complex that has not been approved for FHA financing.  Some estimates have claimed that without the spot loan program, 90% of condo projects cannot have buyers with FHA mortgages. 

We mortgage lenders must work within the rules defined by the regulators – we don’t make the decisions.  But I think the above changes would be very positive, as they would make home and condo ownership less expensive and more realistic for buyers who need the FHA loan program. 

If you know a potential home buyer in Georgia who wants to know if they are on Santa’s, sorry, FHA’s, “good list,” have them contact me at Dunwoody Mortgage.  We will work within FHA guidelines (and explore other potential loan options) to make sure they get the best deal on their mortgage, and hopefully enjoy some FHA guideline “gifts” from Washington soon.

Merry Christmas and Happy Holidays!!