This is a great explaination as to why in more and more cases FHA is the best option for a buyer.
FHA loans have been more wisely used in recent months as the choice of mortgages. What I hate hearing is that they have taken the spot of the subprime loans. This is not true by any part of the imagination. This statement is from those that are inexperienced in both the mortgage and the real estate industries. The realization has been that 30% of the subprime mortgages in the last 5 years previous to the last 2 years should have been FHA mortgages, not subprime.
The subprime loan for many years could go down to a 500 credit score, depending on your equity position. But your rate was usually higher. If your score was higher, the less you needed to put down, the lower your rate. Sounds good, right? Wrong, because the subprime rate was always higher than the FHA rates.
To compound this, so many said just because you had a conventional loan, you had the better loan. This was not always true when putting 3 percent down. In most cases, you were told this, because that particular lender was not FHA approved. Now? Even with 10% down and credit scores less than 680, FHA loans in many cases, will be the best mortgage for you.
So you could argue the fact that this is just my opinion, that FHA mortgages in many cases would be better for you. True, even though I have over 16 years of experience as a loan officer in the mortgage industry. But numbers don't lie. Let me show you.....
The example below is based on a $300,000 purchase price with 5% down. One reason why conventional rates are a little higher in this scenario as in FHA rates is because Fannie Mae and Freddie Mac have added penalties per se. If you are putting down less than 30% and your credit score is less than 720, certain fee penalties would apply to you, which would increase your rate. The FICO (credit score) that I am going to use is 659, which is above the average credit score and I will still show in this example that FHA loans are cheaper, even with 5% down.
***And keep in mind, some lenders have penalties on FHA mortgages with credit scores under 620. And many lenders can't do FHA loans under 580. I can still do credit scores down to 500 with a manual underwrite.***
Disclaimer : These rates are based on today's rates for a 30 year mortgage and can change any time because of various market conditions. To compare this scenario apples to apples, the fees are the same and with zero points. In this scenario, there are no lender fees or points. The conventional rate also includes the penalty for the 659 credit score.
Some of you might be saying that you will be adding $4,897.00 onto your principal balance if you did the FHA mortgage because of the FHA one-time mortgage insurance premium. This is correct and I don't want to confuse you with more numbers and charts. But here is a quick breakdown. If you kept your house for 5 years, which most people sell in a 6 year period, you would have saved $12,770.40 in payments in 5 years. This is a difference of $7,773.40 that you have saved!!! And one other thing that is very small, but still makes a difference. You will be subtracting a few more dollars per month from your principal because your interest rate is lower, which would offset the interest that you would write off on the 7.000% rate. Just something else to remember, but consult your tax consultant or CPA.
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For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!!
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