Tuesday, October 7, 2008

FHA loans - the Affordable, Safe alternative to Fannie & Freddie Conforming loans

We strongly believe that FHA Loans are the safer, more affordable alternative to Fannie & Freddie loans. Here is a quick comparison of the benefits and differences between the two.

All comparisons are based on a purchase price of $250K, fico score of 675, and full documentation. Rates are example only, presented for sample scenario comparison only.

Fannie & Freddie require a minimum of 10% down in California (are capped at 90% LTV).

FHA requires just 3% down (goes to 97%). You can keep the 7% difference in the bank, which gives you liquidity, security, and peace of mind. (the difference is $17,500) The payment difference is minimal (see below for detailed comparison).

Mortgage Insurance Qualification: Fannie & Freddie utilize private mortgage insurance, which requires a second underwriting process from the Private Mortgage Insurance company the lender utilizes. These companies have increased the thresholds for homeownership in recent months. For instance, They require atleast a 10% downpayment in California & have additional underwriting criteria for homeowners or homebuyers in Declining states such as California. **FHA requires just 3% downpayment nationwide, with no adjustments or additional criteria for Declining Markets.

The monthly mortgage insurance rate on Private Mortgage Insurance is between .62% -.78%. Monthly Insurance Premiums for FHA are just .55%. Even more appealing is that the FHA premium is for a 3% downpayment, whereas the private Mortgage Insurance rates are for 10% down payment.

The Private Mortgage Insurance companies do allow a program called "Lender Paid MI" (MI = Mortgage Insurance). With this program you are still capped at 90% in California, however the cost is not paid monthly, it is paid with a higher interest rate. Typically .75% is added to your rate to cover the cost of the Lender Paid MI.

FHA does have a second Mortgage Insurance cost, the Upfront Mortgage Insurance Premium (UFMIP). This amount is 1.5% (soon to increase to 1.75%, which we will us in our example). This lump sum fee can be paid either in cash at closing, or added to your loan amount. Adding the UFMIP to your loan amount is the most common method. However, if you are receiving a large seller credit towards your closing costs, these can be applied to your UFMIP.

Fannie & Freddie require a 620 minimum score to put down less than 20% (ie go over 80%).

FHA has no minimum. However, most FHA Lenders do require a 550 mid fico score.

Fannie & Freddie have price premiums or increased rates for loans that are over 80%. FHA does not increase the rate in this manner.

Here are the real numbers for the sample scenario above ($250K purchase price, 675 mid fico score, purchase loan, California home)

FHA Home LoanFannie & FreddieFannie & Freddie
UPMIP & Monthly MIMonthly MILender Paid MI
Purchase price$250,000$250,000$250,000
Down Payment %3.00%10.00%10.00%
Down Payment $$7,500$25,000$25,000
Base Loan amount$242,500$225,000$225,000
UFMIP (FHA only)$4,243$0$0
Total Loan Amount$246,743$225,000$225,000
Principle & Interest payment$1,401$1,330$1,414
Taxes (1.25% rate)$260$260$260
Homeowners Insurance$52$52$52
Mortgage Insurance Factor (Monthly)0.55%0.62%0
Mortgage Insurance (monthly)$113$116$0
Total Monthly Housing payment$1,826$1,758$1,726
All amounts are estimates, provided only to show the comparison between these

loan programs.

Compare after 5 yrs and again after 10 years.

After 5 years, let's compare:
monthly payment$1,713$1,645$1,726
Monthly payment Savings$0$4,080$6,000
Bank account ($17,500 @ 4% interest)$21,297$0$0
True savings after 5 years$21,297$4,523$6,630
Interest Paid - years 6-10$59,582$64,122$70,236
extra interest paid vs FHA$0$4,540$10,654
bank acct after 10 years$33,428$17,762$14,774
True savings after 10 years$33,428$13,222$4,120
Assumes that you actually invested the monthly savings each month, made no withdrawals,
interest rate was constant at a conservative 4%,
continued to save the additional amounts below the $1826 after MI was stopped, etc

**All amounts are estimates only, provided only to show the comparison between these loan programs on a given day for a sample scenario.

The FHA Loan is the safest overall option, as it is safer to have a slightly higher Mortgage payment along with $17,500 in savings, than to put the extra money into your downpayment and save just a few dollars per month. You will have the $17,500 earning interest, available for emergencies, and diversifying where your money is stored. I think it is safe to say that storing money in your home is not the safest method of savings.

FHA also offers a couple of programs that Fannie & Freddie do not:

FHA Secure - for homeowners who want to refinance their ARM or Adjustable Rate Mortgage into a safe, secure, fixed rate FHA Loan. This program even allows Short Payoffs, or a Short Refinance. This is where the current lender accepts less than owed, to help the homeowner get into a safe, new loan based on current values. This program allows late payments on the mortgage.

FHA Hope for Homeowners - This is another FHA program that facilitates Short Refinances of your current loan. This program allows some mortgage lates, and gives the banks clear criteria for how much they will receive when agreeing to enter into the Short Refinance into a Hope for Homeowners loan. This loan does have an equity sharing agreement, where the homeowner must agree to share future appreciation in their home above the new lower loan amount with FHA in the event they Refinance or Sell their home in the next 10 years. This is a fair trade for the life preserver this loan offers.

The FHA 203K Streamline loan - This loan allows homeowners to Purchase or Refinance their property and include up to $35K of repair/upgrade work into the primary loan. This avoids the higher interest rates of Equity loans. You have one payment at a low fixed rate.

When it is time to purchase or refinance your home, contact the FHA experts at VanDyk Mortgage. 866-900-2342 toll free or online at

VanDyk Mortgage is a FHA Direct Lender doing FHA loans (and Fannie / Freddie loans too) in many states including California, Washington, Florida, Georgia, and more.

No comments:

Post a Comment