Posts Tagged ‘upfront mortgage insurance premium’

FHA loans are back!

July 21, 2015

blog-author-clayjeffreys3

President Obama issued an executive order that reduced the monthly mortgage insurance premium on FHA loans by more than a third. This order started in January. Since then, FHA loan applications rose dramatically. From February through May of this year, the number of FHA loans essentially doubled from the same time period in 2014.

Why all the love for FHA loans? Because the total monthly payment is more competitive now with conventional loans. Prior to the change, home buyers with excellent credit would see monthly mortgage insurance rates 2.5 times higher for FHA loans than conventional loans. Since the change, FHA monthly mortgage insurance is still more expensive, but nowhere near as bad as it was before the executive order.

In fact, I’ve been able to recommend FHA loans again to my clients. What I mean by that is this… prior to Obama’s executive order, the FHA mortgage insurance was so much higher, it made the total monthly payment for FHA uncompetitive to that of conventional loans. Only clients needing a down payment as low as 3.5% or had credit scores under 660 would really consider using FHA loans.

Now the total monthly payments are more balanced, and you see that by the amount of FHA loan applications now being processed. Here is a brief break down of FHA vs. Conventional loans on a decision making basis using credit scores.

  • those with excellent credit will still likely go with a conventional loan even though the interest rate is better on an FHA because mortgage insurance is not permanent (FHA loans can be), and there is no upfront mortgage insurance payment due at closing (FHA requires this).
  • those with average credit could go either way. It really depends on the exact credit score and the rate difference. Remember, the rate for FHA loans are better than conventional, so even though the monthly mortgage insurance could be higher (and permanent, more on this in a minute), the total payment could be basically the same when you take the interest rate difference into consideration.
  • those with below average credit scores tend to go FHA now. Why? The interest rate is much higher on a conventional loan than FHA loans for lower credit scores. Also, the monthly mortgage insurance payment is higher for conventional loans once credit scores go below 680.

The big drawback to FHA loans is that the mortgage insurance can be permanent. That said, under the “old guidelines”, it would take over 11 years of regular, on time payments before mortgage insurance on FHA loans would fall off. Since most people move on average every 7  years, the mortgage insurance would be on the loan the entire time – so “permanent” isn’t as scary as it sounds.

Don’t know if an FHA loan is right for you? If you are buying in the state of Georgia, contact me. We can talk about your situation and decide what loan is right for you and get you into your new home!

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FHA lowering mortgage insurance

January 13, 2015

blog-author-clayjeffreys3

Finally, FHA mortgage insurance becomes more reasonable (and competitive) when compared to conventional loans. As recently posted on this blog, FHA mortgage insurance has been priced so high that it rarely made sense to consider using an FHA loan.

FHA mortgage insurance still has the one-time upfront premium, and is permanent if making less than a 10% down payment, but at least the monthly mortgage insurance payment is closer. Let’s take a look at how the new numbers compare to one another.

  • FHA – the monthly mortgage insurance rate is dropping from 1.35% to 0.85%. Using our same example of a $250,000 purchase price, the total loan amount would be close to $245,500. If you take 0.85% of that amount, you get $2,087, which is $174 per month.
  • Conventional – assuming the buyer’s credit score is 720+, the same $250,000 purchase price with 5% down would give us a monthly payment of $122 for mortgage insurance. When you take into consideration the fact that FHA loans have a lower interest rate, the difference in the total payment between the two is not much at all.

The buyers who could benefit the most from this are ones looking to make as small of a down payment as possible.

  • The 3% conventional loan is only available to first time home buyers. With only a 3.5% down payment, a buyer would qualify to purchase the home and not get hammered on the monthly mortgage insurance payment since FHA has lowered the monthly amount so much.
  • On the flip side, let’s say it is a first time homebuyer and they’d qualify for a 3% down conventional loan. The FHA loan may still be more attractive since the monthly mortgage insurance payment for an FHA loan is now lower than the monthly mortgage insurance payment for a 3% down conventional loan. Also, the interest rate would be lower on the FHA loan.

That is a lot to consider, which is why you should consult a professional who can ask you questions about your purchase, find out how long you plan to stay in the home, and if you plan on aggressively paying down the loan balance. The answers will ensure you choose the right loan for you situation.

Whether a first time home buyer or an experienced buyer, if you are buying in the state of Georgia, I’m happy to help. Contact me today to get started and we’ll get you into your new home.

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FHA Mortgage Insurance

December 16, 2014

blog-author-clayjeffreys3

In a recent post, I mentioned how buying a home using a conventional loan with a 3% down payment helps avoid ridiculously high mortgage insurance payments associated with FHA loans. What makes FHA mortgage insurance payments more expensive than conventional loans?

Due to the housing and foreclosure crisis, FHA continually increased their monthly mortgage insurance payments to help cover their losses from FHA insured homes that went into foreclosure. Prior to the crisis, the monthly mortgage insurance rate was 0.50% of the loan amount per year. After 5 straight years of increases, it is now at 1.35% of the loan amount per year.

Great. What does that mean?

Let’s take a look at some numbers comparing FHA mortgage insurance to a conventional loan with 5% down and also a conventional loan with 3% down.

  • FHA – on a $250,000 purchase price, the total loan amount for an FHA loan would be close to $245,500. If you take 1.35% of that loan amount, you get $3,313 for the year. Divide that out by 12 months, and the monthly mortgage insurance payment is about $276 per month.
  • Conventional 5% down – assuming the buyer’s credit score is 720+, the same $250,000 purchase price with 5% down would give us a monthly payment of $122 for mortgage insurance. The FHA loan is more than double that amount per month.
  • Conventional 3% down – again, assuming a 720+ credit score and a $250,000 purchase price with 3% down, the monthly mortgage insurance payment would be $222. That is about 25% less per month compared to an FHA loan.

The monthly mortgage insurance payments for conventional loans can be noticeably lower than FHA loans. I haven’t even got into the fact that all FHA loans come with an upfront mortgage insurance premium of 1.75% of the loan rolled into the loan amount (about $4,200 rolled into the loan amount on a $250,000 purchase price). Nor have I covered how, in most cases, FHA mortgage insurance is permanent.

I encourage my clients, when they qualify, to use a conventional loan to purchase a home because conventional mortgage insurance is typically lower per month, there is no upfront premium, and the mortgage insurance is not permanent. That said, sometimes an FHA loan is still the way to go.

Looking to buy a home in the state of Georgia but are unsure if you should use a conventional or FHA loan? Contact me today to get started. I’ll go through the pros and cons of each, and we’ll run the numbers to see which option makes the most sense for your specific situation.

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Small down payment loan options

March 13, 2013

blog-author-clayjeffreys2
With yet another round of FHA mortgage insurance premium increases set to begin on April 1, 2013, many people think their only option of buying a home with a small down payment will just have to coincide with a ridiculously high monthly mortgage insurance payment.

What many people are not aware of is the fact that conventional loans have a program that requires only a 3% down payment. You will need a higher credit score than an FHA loan, but the down payment is actually smaller than an FHA loan. Also, you can get approved for conventional loans with as little as 5% down. Let’s talk these loan programs.

As we have recently discussed, FHA loans only require a 3.5% down payment. The drawback in the monthly mortgage insurance. Starting April 1st, all new FHA loans will have a 1.75% up front premium rolled into the loan amount. Also, the monthly mortgage insurance will increase to 1.35% of the loan amount. The mortgage insurance payments will be permanent unless you make a 10% down payment when you buy the home. The advantage of FHA loans is that your credit score can be as low as 640, but it comes at a cost of a REALLY high monthly mortgage insurance payment.

Conventional loans with 3% down do require higher credit score of 700, but you do get by with a smaller down payment. That isn’t the only thing that is smaller. The monthly mortgage insurance rate is only 1.15% of the loan amount. Also, there is NO upfront mortgage insurance premium rolled into the loan amount. If you have a qualifying credit score, this program comes with a smaller down payment, no upfront mortgage insurance premium, and a lower monthly mortgage insurance rate.

Conventional loans with 5% down only require a 660 credit score. The down payment is higher than an FHA loan, but again, there is no upfront mortgage insurance premium. Even with a 660 credit score, the monthly mortgage insurance will be less than an FHA loan. If you have a credit score in the 700s, the monthly mortgage insurance could be half as much as an FHA loan.

Whether you are a first time home buyer OR just someone looking to buy a home and need a small down payment, you have options other than an FHA loan. You can qualify for a conventional loan with as little as 3% or 5% down. In both cases, the monthly mortgage insurance will be less than an FHA loan. There is also no upfront mortgage insurance premium being rolled into the loan amount.

With all of the changes taking place to FHA loan, conventional loans are becoming more and more attractive. If you haven’t discussed a conventional loan with your mortgage broker, you should. If you are buying a home in the state of Georgia, contact me* and we can discuss it today!

* scroll down to the bottom of the page for my contact information

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FHA needs a bailout?

August 14, 2012

I ran across this article by The Economist last week. It raises a valid point, and provides some insight into why FHA has made changes to their guidelines over the past few years. The one thing to know is that FHA loans do not need a bailout – for now. That is also the opinion of this article.

For the full article, please use this link. For a quick summary of the points:

  • FHA loans were intended to help people to secure home loans coming out of the Great Depression
  • FHA loans were a niche program until they began losing market share to subprime lending in the early 2000’s
  • when the housing market crashed, borrowers looking for subprime loans turned to FHA loans to purchase homes
  • In 2006, FHA insured loans of $52 billion. That figure increased to $330 billion by 2009. As you can see, FHA did become the new subprime loan program as I personally blogged about in 2008.
  • FHA now has some “dicier” loans, which is why the guidelines have increased with minimum credit scores and increases to monthly mortgage insurance rates
  • As long as there is not a double dip recession, it appears FHA will be OK and not in need of a bailout.

The one aspect the article ignores is going into detail about mortgage insurance. The upfront premium was increased from 1% of the loan amount to 1.75% of the loan amount. The monthly premium has increased 5 times in the past few years.

For all of you who ask “why is FHA continuing to increase its monthly mortgage insurance premiums?,” this article sheds some insight. It is to ensure FHA continues to operate and not need a bailout as it fully guarantees billions and billions of Dollars worth of loans from the U.S. housing market. The increase of premiums are designed to keep the coffers full to cover the losses from foreclosures on FHA insured home loans.

I hope this has provided some insight into FHA loans and the reason for all of the guideline changes over the past few years.

MI comparison for FHA and Conventional Loans

August 7, 2012

I received an email Monday afternoon inquiring about differences between mortgage insurance on FHA and Conventional loans. After replying to the email, I thought about it and couldn’t remember the last time I posted anything on this topic. There have been many changes to mortgage insurance for both conventional (premiums gone down if above average credit) and FHA (premiums gone up across the board) loans. Let’s take a look at mortgage insurance rates as they are today.

FHA Loan with a minimum down payment of 3.5% on a loan amount of $250,000:

  • there is an upfront one time mortgage insurance premium of 1.75% of the loan amount. In this case, $4,375 is added to the loan
  • the monthly mortgage insurance is based on a factor of 1.25% of the loan amount divided by 12 (months of the year)
  • in this example, the monthly mortgage insurance is $264
  • these insurance rates hold for credit scores down to 620

Conventional Loan with a minimum payment of 5% on a loan amount of $250,000:

  • there is no upfront one time mortgage insurance premium
  • the monthly mortgage insurance is based on a sliding scale. The higher the credit score, the lower the premium. Assuming the credit score is 760+, the monthly factor is 0.59%. That is less than half of the FHA equivalent! At a credit score of 660+, the monthly factor is 1.20%. That is still less than FHA’s.
  • in this example, the monthly mortgage insurance is $122 if excellent credit and $250 a month as long as the credit is at least 660.

As you can see from this 30 year fixed comparison, even with the minimum down payment, the numbers show a conventional loan can result in a lower monthly payment for the borrower based on:

  • no upfront mortgage insurance premium rolled into the loan
  • lower monthly rates on the mortgage insurance. The monthly payment is greatly reduced as one’s credit score increases
  • the numbers improve as the down payment increases on the loan

You might be thinking, “this is for a 30 year loan, what about a 15 year loan?” An excellent question! In the past when putting down 10% or more on an 15 year fixed FHA loan, there was no monthly mortgage insurance. This is no longer the case.

Today a 15 year fixed FHA loan still requires the upfront mortgage insurance premium and comes with a monthly premium of 0.60% of the loan amount if a 5% down payment and 0.35% if a 5-21% down payment. Assuming excellent credit, conventional loan mortgage insurance rates are either the same or slightly better than FHA on 15 year loans. As one’s credit score decreases, the rates on a 15 year fixed mortgage begin to look more attractive.

The moral of the story – generally speaking, the numbers show conventional loans result in a lower monthly payment in terms of monthly mortgage insurance costs. This becomes even more apparent as one’s credit score increases.

When should one consider using FHA? Again, generally speaking, if 3.5% is the only amount you can make for a down payment and/or one has less than average credit. That is where FHA loans may be more attractive, and in some cases, the only option.

How does one decide to go FHA or conventional? You should always talk with a mortgage professional who will ask you questions and give you a pro/con analysis of both loan programs. Be careful of working with someone who gives generalizations like “you are a first time home buyer, then an FHA loan is right for you” and then not provide any more details as to why the loan is right for you. If you are looking to buy or refinance a home in the state of Georgia, I’d be happy to help you put together a pro/con list when deciding between FHA and Conventional loans.

Reducing the number of FHA loans

March 13, 2012

We’ve discussed soon-to-be implemented and proposed changes to FHA loans. While these changes haven’t been implemented/approved, a bigger question emerges… “why are all the changes needed?”

I alluded to the answer toward the end of one of my recent posts. The record number of foreclosures have almost tapped out the mortgage insurance fund for FHA loans. This fund is set aside to process and sell homes with FHA loans that go into foreclosure.

The other reason for the change is the number of FHA loans being closed each year. The government created FHA loans to assist potential homeowners with little credit history purchase a home. FHA loans were designed to be a niche loan program available in the market. Over the past few years more than half of new mortgages are FHA loans. Why did this occur?

Several years ago, I posted the question “is FHA the new subprime loan?” If you take the time to read that post, the statistics are eye opening. The number of FHA loans being approved have only climbed since my post in 2008. Regardless of whether or not you think FHA loans became the new subprime loan, consider this:

  • before subprime loans disappeared and the housing market crashed, FHA loans made up less than 10% of the new loans on the market. At that time there were no credit score requirements, alternate forms of credit were easy to use, the monthly mortgage insurance was less than half of what it is today, and down payment assistance programs were widely accepted.
  • today FHA loans look much different. Minimum credit scores have been introduced, and it is more difficult to use alternate forms of credit. Monthly mortgage insurance rates have more than doubled, and almost all of the down payment assistance programs are no longer acceptable gift sources to be used on FHA loans.

The government intended FHA loans to be a smaller part of the overall loan market. It has become the majority! The changes that have been implemented over the past few years, along with the proposed ones, are intended to keep FHA funded AND encourage buyers who don’t need an FHA to get a conventional mortgage.

Without considering the potential changes to FHA loans discussed last week, conventional loans are more attractive than FHA loans. While the minimum down payment is slightly larger (5% versus 3.5%), the mortgage insurance is noticeably less each month, there is no upfront mortgage insurance premium, and the credit score requirements are very similar to one another.

By making FHA loans more expensive on a monthly basis, the government hopes to turn FHA back into the niche market it was intended to be by steering buyers toward the use of conventional loans.

So… if you are sitting out there wanting to buy a home and need an FHA loan, from the trends over the past few years, FHA loans will only continue to be less attractive versus conventional loans. While rates are at historic lows and home values depressed, there isn’t a better time to buy a home. As we’ve discussed the last two weeks, FHA loans will only get more expensive month-to-month. If you are looking to buy a home in the state of Georgia, I can help get you started with the preapproval process!