Buying a Home? Why the FHA Loan is No Longer the Low Down Payment Loan of Choice

This the second article in a series discussing the ins and outs of the best mortgage loan products available for home buyers.  Last week, the USDA Rural Housing Loan was featured.

The FHA loan was once a very popular and useful loan for helping first time home buyers achieve their dreams of home ownership.  “Was” is the key word though because this loan is no longer the loan of choice for most home buyers.

First let me explain why the FHA loan has become the dinosaur of mortgage loans, and then I will explain what is the new best loan with a low down payment that can be obtained anywhere, regardless of whether it is in the City limits or not (see last week’s article about USDA loans).

Due to substantial losses taken during the economic recession and housing crisis, the FHA (Federal Housing Administration) had to increase its revenues to keep operating and attempt to avoid  a taxpayer bailout.  FHA makes its money by insuring loans which in turn allows mortgage lenders to grant loans over 80% loan to value.  In short, the FHA (backed by the U.S. Government) stands behind the loan, allowing lenders to loan home buyers up to 96.5% of the cost of the house.  Without this guaranty, lenders will not loan more than 80% of the cost of a home, eliminating many potential home owners from being able to buy.  After all, how many buyers have an extra $40,000 to put down on that $200,000 house?

For its most popular loan, the 3.50% down 30 year fixed rate mortgage,  FHA now charges 1.75% up-front Mortgage Insurance (MI) and an additional 1.35% annual MI based on the outstanding loan balance.  This annual MI expense used to drop off after the loan reached around 78% loan to value and home owners could request its removal after only 5 years.

However now, FHA borrowers must pay this MI for the full 30 years of their loans even when the loan to value is less than 50%, even when it is less than 10%.  On a $200,000 house the cost of the up-front MI would be $3,377.50 and the beginning monthly MI cost is $215.46 or $2,585 in just the first year.

The FHA loan was designed with a noble cause in mind: to make home ownership more affordable.  Yet now when compared side by side against the USDA Rural Housing Loan and the Conventional Loan with 3% Down, FHA is the most expensive loan option available.

There are a few scenarios where it does make sense to get an FHA loan:

  • If the buyer has had a bankruptcy and/or foreclosure within the past 7 years. Conventional financing requires a 7 year period to have passed, but FHA’s waiting period is only 3 years.  I recently closed a loan where FHA granted an exception and allowed the loan to be made less than 3 years from the foreclosure date (but greater than two years) due to extenuating circumstances.
  •  Manufactured Home Loans. The only mortgage loan product I have available for a manufactured home is an FHA Loan Product.  This is a lower cost loan than other financing for manufactured homes through finance companies.
  •  Refinancing? FHA offers some higher cash out refinance options than conventional loans and also FHA has a Streamline refinance where the home owner can get the benefit of a lower rate without having to have an appraisal completed on the house. This is very useful for those who home value is under water.

If you cannot qualify for a USDA Rural Housing loan due to income or property location eligibility reasons and want a low down payment loan, the Conventional Loan with 3% down is a better and lower cost option than the FHA loan.  I’ll feature this product in my next post.

You are welcome to email specific questions to me at mtarleton@englending.com, call me at 850-866-2963, and also visit my website at www.bankofengland.us.

Mike Tarleton
Sr. Mortgage Loan Officer
Bank of England
850-866-2963 (Cell)
706-888-0980 (Cell / Text)

NMLS: 264821
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Hot Dog Story – Do What You Do and Change for No One

viking_dog1

Okay, I know there is so much talk about all the awful things that people see happening in our world. Lucky for me I DO NOT  buy into that.  There will always be challenges and struggles and while this one seems to be very daunting I have learned that those that find the bright spots and DO NOT operate out of fear end up on the top and better yet they enjoy getting there.

Please go to this link and read this incredible hot dog story that just might convince you to just keep on doing those things that you know work.  I have always loved this story and it is quite relevant today.  Do not give in to the negative small minded thinking and talking that we hear so much of. Most of us have more than we need and plenty that we could be sharing with others.

I am so grateful to all of you that have made my life so bright and always filled with promise.  I decided a long time ago to align myself with people that were looking for the possibilities rather than the problems.  I have been writing gratitude list since I was 10 years of age and it has never failed that my life is so filled with more goodness than not.

Thanks to all of you and go read that story and share it with others…. lets the spread the good stuff.   I believe the world needs a shot of happy stuff and I am just the girl to deliver it.

Remember my get even list, it is really long…. “The only people we need to get even with are those that have helped us”

with overflowing gratitude,

Karen Key Smith

Historically Low Mortgage Rates Should Kick-Start Housing Market

Through a series of rate cuts and capital market tinkering, the Federal Reserve has finally managed to push down long term mortgage rates to levels not seen in nearly forty years. The rate on the conforming thirty-year,  fixed-rate mortgage was hovering close to 5% on Friday as the yield on the ten year treasury note sank to 2.07%. This thaw in the mortgage credit market is a welcomed sign that the ingredients are coming together to hopefully re-energize the comatose housing sector.

This huge swing came after the Fed lowered the funds target rate to a range between 0% and .25%.  This marks the tenth time for the Fed to cut rates in the last 15 months.

The Mortgage Bankers Association reported a surge in mortgage application activity over the past week as homeowners rushed to refinance their existing mortgages.  The combination of low rates and low housing prices should also create some demand in the purchase money market as well as consumers look for safe investments in these difficult economic times. Though a flood of buyers is unlikely, we can be optimistic that the first quarter of 2009 and beyond may see an increase in real estate sales and, hopefully, an end to home price declines.

For this and more, visit my blog at www.activerain.com/blogs/hpalmer

Hunter Palmer

Fed Lowers a Half Point – I Have a Better Idea

The Federal Reserve’s Open market Committee announced Wednesday it was lowering the federal funds rate to 1%, it’s lowest level since 2004. Yet mortgage rates rose on the news and continue to rise today. Though, on the surface, this may seem contradictory it exposes a symptom of the larger financial crisis we face. Since seizing Fannie Mae and Freddie Mac and passing the bailout plan, the Federal government has committed hundreds of billions of dollars in an attempt to thaw frozen credit markets and get the economy back on track. Unfortunately, all of that money is essentially borrowed.

Now the Feds are forced to sell billions in government bonds to fund their various bailouts and bank rescues flooding the market with an oversupply and thus driving down bond prices and driving up rates. This has a ripple effect throughout the capital and debt markets and increases the cost of borrowing for Fannie and Freddie. The higher borrowing costs are reflected in higher mortgage rates for consumers.

The bigger problem facing the Federal Reserve is that higher mortgage rates will have the effect of further weakening demand in the housing market. This will further amplify what is at the heart of this whole mess – declining home prices. As mortgage rates rise and home prices decline further, the rate of foreclosure is sure to rise putting even greater strain on banks and credit markets as well as Fannie Mae and Freddie Mac as the value of their assets depreciate and their ability to raise capital becomes more tenuous. To stop this vicious cycle the Fed and the Treasury must find a way to halt, and eventually reverse, the decline in home prices rather than continuing to merely react to each emergency caused by it. So how could they do it?

There have been a lot of proposals floated in recent weeks that aim to shore up the housing market, stop home price decline and prevent foreclosure. Some of these sound bizarre but viewed in the context of this historic financial crisis I’m willing to entertain anything.

One suggestion has been for Fannie and Freddie as well as banks taking part in the government bailout to offer mortgagors the option of a sixty year amortization. This would dramatically lower payments while not reducing the principal owed and provide an incentive to lenders in the form of greater interest income. Others say to allow everyone to refinance to some set fixed rate such as 5.25% that would provide payment stability and offer most borrowers some relief in the form of lower payments.

Still others have called for an outright principal reduction to lower mortgage balances to a point where borrower’s are no longer upside down in their homes. All of these ideas may have some merit but, in my opinion still do not address the root of the problem. We must create demand in the housing market so home prices will stabilize. How might that be done?

With thirty year mortgage rates creeping upward towards 7% for many borrowers, it is time the Feds start using some of the bailout money to back a program that would allow for a dramatically lower interest rate for all home-buyers coupled with a federally backed mortgage insurance plan to allow for lower down payments and longer amortizations. The lower rate, say 5.00% fixed for 40 years, along with a required down payment of 5% offset by a federal mortgage insurance premium of .75% annually but paid monthly would surely bring reluctant buyers back into the market. The increased demand for housing would drive up prices thus creating a win-win for the government in that the value of the bank stocks they now own would rise along with the portfolios of Fannie Mae and Freddie Mac’s mortgage backed securities. Banks, not wanting to miss out, would begin lending again and the resulting competition would increase liquidity in the credit markets and benefit the economy as a whole and reduce the number of foreclosures.

This plan would not be a reward for bad behavior, would not punish homeowners who have paid their mortgages on time and could be easily implemented through the FHA, Fannie Mae and Freddie Mac. Yes, it would be expensive in the short-run. But given the impotent attempts by the Feds to stop this snowballing housing crisis by hoping banks will lend again by throwing more at them are obviously not working. We need a better idea.

For this and more, visit my blog at www.activerain.com/blogs/hpalmer

Hunter Palmer

The Fed Leaves Key Interest Rate Unchanged

Yesterday, at the Federal Reserve’s regularly scheduled meeting, it was decided to leave the key interest rate at 2%.  Economists had predicted a likelihood of the Fed raising the rate to help ward off inflation and slow economic growth.

This was the second scheduled meeting that the Fed chose to leave the key interest rate the same.  Over the last 11 months, the Fed has lowered the key rate seven times.  Given the economies fragile state with the weak labor and financial markets, it would seem that no move was the best move at this point.

In anticipation of the meeting yesterday, the markets rallied, up around 225 points before the Fed’s announcement.  With the services sector falling less than expected and oil futures dropping to around $118 a barrel, the Dow had gained 330 points by the end of the day yesterday.

The S&P 500 rose just over 2.87% or 35.87 points and NASDAQ rose 64.27 points or 2.81%.

Fed Cut Interest Rates .25% Wednesday

In what is likely to be the last rate cut – baring any more financial market blowups – in a while, The Fed cut the federal funds rate another quarter point Wednesday from 2.25% to 2%.  The rate 5% as recently as September.

The statement “downside risks to growth remain” was removed from the Fed statement indicating to many analysts that we should start to see signs of recovery and that we are showing fewer signs of a downturn.

“They haven’t closed the door to further cuts, but they’ve shut it part way,” said Mark Zandi, chief economist for Moody’s Economy.com. “They’re saying they believe they’ve done enough.”

Continue reading “Fed Cut Interest Rates .25% Wednesday”

Have we hit bottom?

Has the real estate market nationwide hit bottom?  I hear Realtors all the time say that business is picking up for them.  In addition, I was looking through the New York Times Real Estate section, and not one article in the  18+ articles posted was negative.  Not one article was telling of how we are all doomed to suffer endless real estate woes for the next million years or that prices have dropped again for the umpteenth time.

The National Association of Realtors is predicting a “notable improvement” in the real estate market in the second half of 2008. Lawrence Yun, cheif economist for the NAR, said “Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure,” he said.  “We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets.  The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met.”

Continue reading “Have we hit bottom?”