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Hey folks,
Eric Newman here. If you've been around the housing market or ever obtained a home
loan any time in the past
you probably heard about the FHA home loan program.
This is a government-backed or insured loan that was originally set up
to help borrowers in under-served areas, maybe those with lesser down payments
orlower credit scores
be able to enjoy the benefits of homeownership. First-time buyers loved
this!
In fact, seventy-eight percent of FHA loans on the books right now
are first-time buyers. Why are first-time buyers using this?
Mostly because they don't have enough cash, or at least they think that,
to qualify for traditional conventional financing.
Well, there have been a lot of changes in the last several years. Right now, FHA is actually
struggling to survive.
They've paid out so much in claims due to all the short sales and foreclosures, that
congress is talking about having to bail them out just keep them viable.
And on the flip side, conventional financing
because of the cleanup in the mortgage industry in the last several years
has actually loosened its lending guidelines and made it easier to get a
conventional loan than it would have been in the past. Let's run a quick compareison:
First of all
with the FHA financing, only a three and a half percent down payment is
required.
With conventional, its 5 percent. So really not that much of a difference
there
FHA has always been known to allow gift funds for the down payment and closing
costs
Gift funds mean you have a family member - or somebody with a closely
established
relationship - provide the money for you for your down payment and closing cost
for your loan.
Conventional loans haven't always allowed this. But recently
that has been totally loosened up and now you're entire down payment
for that 5 percent down for conventional can also be gift funds!
FHA requires (at least in-house for us)
a 640 minimum credit score. Same for conventional.
So as you can see both these programs are actually quite similar in terms
of qualifications.
Now where's the real difference? That comes in the mortgage insurance.
Because of FHA's struggles they have incrementally
raised the cost of monthly mortgage insurance, AND the up-front portion
they're adding to the loan balance. They've raised that just about every six months in the
past several years
So now it is considerably more expensive than its conventional counterpart for a
lot of borrowers.
Conventional loans allow you to get rid of your mortgage insurance
once you've build up at least 20 or 22 percent equity in the home
through paying down the balance, or your home going up in value.
FHA now will require you to keep your mortgage insurance
for the life of the loan. So in other words...it never goes away.
When you look at the cost that you pay in for a FHA loan vs the cost of a
conventional over a 5 to 10-year period of time, conventional is going to win out
probably ninety-eight percent of the time.
So the next time you wanna get approved to buy a house
maybe you only have a small amount of cash, maybe have a family member willing to
help you out,
you should explore conventional financing as an alternative to FHA
as it could be much better for your bottom line. Give us a call we can run
the numbers for you:
or email:
Have a wonderful day!