In this class James discusses the pros and cons of using FHA loans.
Are FHA Loans For Suckers?
- Their equivalent of Private Mortgage Insurance (PMI)–Mortgage Insurance Premium for FHA loans—is usually higher compared to PMI on conventional loans
- Their Private Mortgage Insurance never goes away
- You got to sell or refinance into a different loan to get rid of it
- Mortgage Interest Rates can be higher than for jumbo loans or VA loans
- There are lower down payment programs than just 3.5% down like conventional 3% down payment, VA and USDA nothing down loan programs as just a couple examples
- So, are FHA loans for suckers?
- Well, not so fast… let’s look a little closer at these issues AND some of the other benefits of FHA loans…
Private Mortgage Insurance Primer
- Since a hefty part of the discussion of FHA loans involves Private Mortgage Insurance (PMI) I’ll give you a very brief introduction about PMI here
- I’ve taught 2-hour classes just on PMI and will probably do another episode about them soon
- What is it?
- Insurance you pay for to benefit the lender to protect them in case you default
- Often can be paid up-front, monthly or both
- How much is it?
- Lots of factors determine the rate.
- Except with FHA loans they are usually standardized for everyone but can vary depending on the term of the loan you choose and the amount you put down.
- When do you typically need to pay it?
- Less than 20% down
- Some exceptions like VA
- 3 choices: monthly, lender-paid or one-time up-front
- Can increase the interest rate and pre-pay it upfront.
- Often call this “Lender-Paid PMI”
- For FHA, there is both a one-time up-front payment and an on-going monthly premium payment
- They call the one-time up-front payment an “Up-Front Mortgage Insurance Premium” and the monthly Private Mortgage Insurance Premium a “Mortgage Insurance Premium” or MIP for short
- The Up-Front Mortgage Insurance Premium is usually 1.75% of the loan amount.
- Can finance this into the loan.
- The monthly Mortgage Insurance Premium is usually .85% of loan balance when putting 3.5% down with a 30-year loan.
- It can change if you do a 15-year loan or put more than 3.5% down
Might Be Different
- Things change over time and from lender to lender
- Always check with your lender to verify what I am telling you
- Just because one lender you talk to says it can’t be done, it does not necessarily mean that it can’t be done
- Different lenders have different loan programs
- Different lenders look at things differently and may be willing to do something that all other lenders won’t
- We’ll primarily be discussing what I believe most lenders will do
- Sometimes lenders have overlays or internal policies that are more restrictive than what the loan program requires
- For example, the FHA loan program may require a credit score of 640 but the lender may have an overlay that says that they’re not going to originate FHA loans unless the borrower has a credit score of 660.
- If you went to another lender, they may be willing to originate the loan with the program minimum of 640.
Interest Rates Comparison of Various Loan Products
Mortgage Interest Rates
- I’ll show you an email I received from a credit union (local to where I live)
- This is not an offer of that rate to you
- Rates can vary
- Over time (and even throughout any given day)
- Based on the loan product
- Your credit score… although typically FHA rates do not vary based on credit score
- This does NOT include the monthly Private Mortgage Insurance/MIP premium
Mix of Loan Types
FHA Easier to Qualify For
FHA Credit Scores
Average Credit Scores
Allows You To Buy Multi-Family Properties
- One of the advantages of using FHA loans is that it allows you buy duplexes, triplex or fourplexes in addition to single family homes with just 3.5% down
- As of the time of creating this presentation there is not a conventional loan option that allows you to buy a duplex, triplex or fourplex as an owner-occupant for less than 15% down (and that’s for duplexes only).
- To buy a triplex or fourplex as an owner-occupant where you move into one of the units with conventional financing you’re looking at 20% down payment.
- To buy a duplex, triplex, or fourplex as an investment (where you don’t move into one of the units) is 25% down
- So, being able to buy a duplex, triplex, or fourplex as an owner-occupant with as little as 3.5% is amazing.
- Maybe… just maybe… FHA loans are not for suckers after all, right?
PMI Lasts Forever
- Typically, if you get a conventional loan (not an FHA loan) and put less than 20% down, you’d be required to pay Private Mortgage Insurance.
- If you opted to pay that monthly, the monthly PMI payments last until you have 20% equity in the property then you no longer pay the monthly PMI payment.
- However, that’s not the case with FHA loans.
- If you’re doing an FHA loan with 3.5% down, the monthly Mortgage Insurance Premium (MIP) never goes away even when you’ve paid down the loan and property values have gone up such that you have more than 20% equity in the property.
- If you put more than 10% down, MIP goes away after 11 years
One FHA Loan At A Time
- There are exceptions, but typically you can only have one FHA loan at a time
- So, it will be hard to Nomad™ with more than one FHA loan
- Making it hard to buy more than one multi-family property as a Nomad™ without also being able to use VA financing or alternating purchases with your spouse.
- Also, some underwriters will not approve of you buying a multi-family property after you’ve been living in a single-family home
Return on Investment from Debt Paydown
So, are FHA loans for suckers?
- Higher PMI
- Lower than 3.5% down payment options available with other loan products
- Up-Front and monthly PMI (MIP)
- No benefit for higher credit score for PMI
- PMI lasts for the life of the loan
- Sometimes higher effective interest rate (when PMI is included)
- Can typically only have 1 FHA loan at a time
- Must owner-occupy
- Multi-family properties with just 3.5% down (without VA benefits)
- Duplexes, triplexes, fourplexes
- Huge plus for House Hackers and Nomads™
- Lower credit score required
- Higher Debt-To-Income allowed
- Easier to get with bankruptcy or foreclosure
- This is often the loan combined with down payment assistance programs
- If available in your market
In this presentation James mentions the following resources:
- The Ultimate Guide to Private Mortgage Insurance – A full class on Private Mortgage Insurance.