Some of the most common questions that loan officers are asked is, "what is the difference between an FHA & a regular (conventional) loan)?
There's conventional, there's FHA & then there's the old sub-prime that people have been royally given the raw end of financing.
Today I had a neighbor tell me he had just refinanced 4 1/2 months ago & he had a 7.5% inerest rate. So we sat down and looked over his paperwork and it was not a 7.5 % rate, it was an 11% interest rate. This is a hard money term loan. Who in the world would do this to a young family? Wouldn't you believe it but none other than a retail branch of Wells Fargo Bank. He was told he was getting an FHA loan at 7.5% and it would be an FHA loan. So we read the note & there's of all things, a pre-payment penalty of 3% for 3 years. My neighbor tells me that he was told that the banker that did the loan said they were the last place that was able to do this type of loan. My neighbor told me that the loan officer at the bank went out of town and someone else worked on the file in place. He was charged 4% origination and 4 % higher of an interest rate. No wonder Wells Fargo posted 1st quarter earnings on 2.5 Billion Dollars higher than the forecasted projections. These are both unscrupulous bankers and dishonest bankers giving whomever they can the royal enema of fiance during the time that they should be honest and forthwright.
So many people have been ragging on mortgage brokers and loan officers that work for mortgage brokers. This is a perfect example of who should and should not be in the business.
Do bankers or employees of credit unions required to take classes and also to take & pass a test prior to being able to help anyone with loans?
Answer - No they are not. But loan officers for mortgage brokers are required to take classes & past tests that cover both federal and state laws as well as general loan knowledge.
Are bankers licensed as loan officers? Answer - No they are not. But loan officers for mortgage brokerage companies are licensed and go through a much stricter back ground testing and education .
Do loan officers at Banks and credit Unions required to have continuing education hours every year? Answer - No they are not required to have continuing education classes or credits. But loan officers for mortgage brokerage companies must take continuing education classes in order to maintain their licensing every year.
Why is this that banks and credit unions don't require their loan officer to meet the same standards that loan officers for mortgage brokers must go through and maintain? That's a very good question. Seems like there's a double standard. Well there is. It's the big brother double standard. The banks get away with paying lots of money to political issues and hence they can pay a small fee to an insurance company that issues a bond that covers all the workers as a blanket coverage for everyone. This is done in replacement of having each person going through licensing and instead of having loan officers go to classes and training their employees that don't understand the vast array of products, the numerous laws, understanding different scenarios of what to counsel a homeowner or future homeowner based on what would be best for them, yet they seem to push the products that their bank offers at the time.
Oh, and 95% of the time, rates are lower and more competitive as well as a greater selection of loan options are available that a mortgage broker has access to rather than a loan officer at one single bank or credit union has access to. So if one lender can't help someone, there's a higher liklihood that it can be done with a loan officer that works for mortgage brokerage company.
So as I was driving across town this afternoon, I was mulling over this in my head and am in utter disgust with this situation for my neighbor. Could he have had an FHA loan just 4 1/2 to 5 months ago when he refinanced vs. being given a sub-prime loan? Yes. Absolutely he could have. He was told he was going to have one & unfortunately he didn't look at the interest rate at the time he signed the loan docs. And even worse, he signed at the bank and they didn't go over the interest rate with him. He said they didn't explain any of the paper work at all, they just had the signature pages ready to sign and all the other pages in a folder and he never looked at them until he met with me and we broke them out of the folder he was given.
I share this experience and story as a teaching example for the purpose that a vast majority of the general public doesn't understand the difference between conventional loans, FHA loans & Sub-Prime (the royal enema of mortgage loans for 95% of cases).
So I want to educate anyone and everyone that can absorb the knowledge I have gained to be able to help others in getting the right mortgage for their situation based on their past and current situation as well as their future plans, goals and needs.
With the sub-prime loans not available, there are twp main types of loans for residential financing (other than Reverse mortgages for seniors and VA loans for those with the military background, which is another topic for another posting and discussion).
So what's the difference between FHA & conventional?
FHA vs. Conventional Loans
New standards for conventional Loans.
Need 20% downpayment. (Conventional loans are for borrowers with 80% or less of the purchae price if buying or for 80% or less of the appraised value if refinancing when owned 12 months or greater).
The new conventional loan credit requirement is to have a 700+ Fico score, some instances 720.
The advantages, no mortgage insurance & no upfront mortgage insurance.
FHA Loans have several advantages over conventional loans, including lower down payments and more relaxed credit-qualifying guidelines. The federal government created FHA loan programs to encourage homeownership throughout the country. The FHA can help people to obtain a loan with little or no down payment. The FHA does not supply the loan; it simply insures the loan to limit the risk to the lender.
Benefits of a FHA mortgage:
- A 3% down payment, as opposed to a 20% down payment on traditional loans
- Low monthly mortgage insurance
- Low closing costs, which are regulated by HUD
- No credit score requirements
- Qualify for a loan two years after a bankruptcy
- Qualify for a loan three years after a foreclosure
FHA loans were originally created to help first-time buyers; people who are not first-time buyers may qualify, however, the FHA does not allow anyone to have more than one FHA-insured loan at a time.
The borrower is required to pay an insurance premium upfront, but this premium can be financed into the loan amount directly. The borrower must also pay a monthly premium, which is .55% of the total loan amount divided equally over 12 months. Unlike a conventional loan, the FHA requires a termite report and clearance, as well as a few other property condition standards, to qualify for a loan.
All FHA loans have what they call "Upfront Mortgage Insurance". This is what that funding fee. It is charged on EVERY FHA loan. The fee is 1.75% for purchases and refinances with the sole exception being FHA to FHA refinances. Then the fee is only 1.5%. If you are refinancing a delinquent FHA loan, the fee is 3%. This money goes into a pool of money that FHA uses to pay defaults. This is not a fee your lender gets to keep. They will also not to bring this money to closing. It gets added to the loan size.
