FHA Loans vs Conventional loans is an important discussion. Since you can no longer drop the MIP on an FHA loan, I wanted to show a comparison between a 3.5% down payment FHA loan and a 5% down payment Conventional loan. I think it may encourage some buyers to save up a bit more to get 5% down for a Conventional loan.
Blog Category: FHA
FHA loans are federally backed loans insured by the Federal Housing Administration. FHA loans are traditionally used by buyers who cannot come up with the larger down payments required on a Conventional loan which has a minimum down payment of 5% down on single family homes and 20% to 25% down on multi-family homes. The perception is that FHA loans are typically used more by lower to moderate income buyers, however not all buyers who use FHA are low to moderate income homebuyers.
The FHA loan program started during the Great Depression of the 1930s, when the rate of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance to encourage them to lend. FHA does not lend the money to homebuyers, they insure the lenders that lend the money against loss.
FHA loans fell out of favor during the real estate boom of 1998-2006, as sellers did not want to be exposed to the more marginally qualified buyers that were usually attached to an FHA loan, nor did they want to hassle with the more stringent appraisal requirements of an FHA loan.
However, in a buyer’s market, FHA loans are commonly accepted in most markets, and FHA loans have become a savior for many home buyers in some eras. If it were not for the FHA loan, some real estate transactions would not occur.
Each mortgage lender has dozens of loan programs. And there must be hundreds of lenders. We work with 50 lenders or so. And each lender may have a different interpretation or guideline for each category of the loan. These categories would be related to credit, income, appraisal, assets and debt ratios.
What does dropping mortgage insurance mean? This is different for Conventional loans than FHA loans. FHA loans: you are getting a loan that is insured against loss by the federal government through mortgage insurance, you are not getting a loan directly from the federal government. It is this mortgage insurance that many people do not know how or when to get rid of.
FHA Condo Loans Get More Complicated? It used to be simple to get an FHA condo loan. Lenders could do an FHA “Spot Condo Approval” which meant that the condo did not need to be on the FHA Approved Condo List. All we lenders needed to do was verify that the condo met certain FHA requirements. An example of the requirements are 51% owner occupancy, no litigation against the condo, no more than 10% of the unit owners behind in their condo fees, etc. Now the condo approval process is more centralized, and more complicated.
Interpretations can vary and different people will oftentimes see different things in the same picture. It is really interesting how one thing can be interpreted in so many different ways. A perfect example of this is how people interpret the FHA mortgage loan.
Most listing realtors will advise their sellers not to take an offer when the buyer is using FHA financing, at least as long as there are other conventional financing offers that are acceptable. There is a perception that FHA financing comes with some baggage that realtors want to have their seller avoid.
Some things are permanent and some are temporary. The sand drawing in this picture is temporary, very temporary. The recent FHA loan limit increase that the National Association of Realtors (NAR) lobbied for, seems to be temporary. So what is all of the fuss over. For now, we have one extra month of getting loans done at the higher loan limit. That is a big deal? The NAR, however, said the loan limit increase is good for two years. Here is their announcement:
Top 8 Myths About FHA Loans
1. FHA appraisals are difficult and often require repairs:
FHA now allows private appraisers to do FHA appraisals, this solved much of the old repair problems where FHA staff appraisers would require numerous repairs to the house before allowing the loan to fund. And, with FHA, lenders are still allowed to use their own appraiser as opposed to a Conventional loan where the bank’s random choice of appraiser is used. Sellers and Realtors should find this attractive, since the new appraisal ordering system for Conventional loans has become a nightmare. Click here for more information on this issue.
There was some confusion as to how long the latest FHA loan limit increase is going to last, which I blogged about here. Was it through the end of 2011, or 2 full years through 2013, or just through next year and it ends 2012? So the verdict is in, and the latest FHA loan limit increase expires at the end of 2012. So come December 2012, there will be another political fight,
FHA is in some financial trouble and as a result they made some changes to their rules lately. They now require that new FHA borrowers, as of April 1 2013, continue to pay mortgage insurance premiums for the life of the loan. An old FHA rule, dating from 2001, had allowed borrowers to cancel their mortgage insurance when their outstanding balance reached 78% of the original principal balance.
FHA mortgage insurance costs are going up…again. It is almost like watching the price of stamps constantly creep up. However, postage prices creep up due to inflation, whereas FHA mortgage insurance cost goes up due to waste, inefficiency and massive losses at FHA. Here is a breakdown of the increases:
A long expected shakeup in the way FHA calculates its Mortgage Insurance Premium is expected to take effect on September 7th, 2010. (*UPDATE: I now hear FHA will make these changes on all new FHA loans effective October 4, 2010). I first wrote about this here. Now the proposed changes have taken on a new cost structure.
The Federal Housing Administration (FHA) is soon going to raise their mortgage insurance costs, again. FHA is the largest insurer of low down payment mortgages. It has been announced recently that they are in trouble and may be in need of a taxpayer bailout. This told me at that time that their fees would increase soon. Soon has finally arrived.
The FHA is reeling from rising defaults in its mortgage business. By law the agency must set aside 2% cash to deal with unexpected losses. As of September 30, those reserves had dropped from almost $13 billion to just over $3.6 billion. This total represents only one-half of one percent of all outstanding single-family-home loans insured by the FHA. This is the first time since 1994 that it has been this low.
What is a community property state?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states. Community property laws require divorcing couples to split assets acquired during a marriage equally. Marital property includes earnings, all property bought with those earnings, and all debts accrued during the marriage.
When you’re buying a home or thinking of buying one, you’ll need to factor in many costs other than the home loan. If you’re not making a 20 percent down payment, and most people don’t, private mortgage insurance, or PMI, is at the top of the list of costs to consider.
Fannie Mae has recently changed a policy that was very difficult for many people. This policy was imposed during the height of the financial 2008 crisis. It was intended to be temporary in nature. So it was expected to change at some point. It sure did take a long time. The policy formerly was related to renting out your current primary residence