FHA vs. Conventional Loans

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
  

The FHA loan guidelines are more relaxed than conventional loan guidelines; this includes less strict regulations about past bankruptcies and/or foreclosures, job requirements, use of alternative credit, and debt-to-income ratios. The FHA ensures that their interest rates remain competitive with the interest rates of conventional loans.

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.

How About an FHA Streamline Refinance?

One of the smartest ideas remaining in the FHA and VA programs is the concept of streamline refinancing.

Essentially the idea is that if you can afford your current mortgage you can surely afford your current mortgage if the monthly payments are reduced.

The elevator pitch of a streamline refinance is that if you have an existing FHA or VA loan, you don't have to go through the traditional red tape that you previously went through when you first obtained your FHA or VA loan. The result is that with a streamline refinance there are relatively few application requirements, and the time in doing so can be very quick in comparison to what you were accustomed to the first time you obtained an FHA or VA loan.

Note that with a streamline refinance you can get either a new 30-year term or you can add 12 years to your current loan term. Making a loan longer at the same rate or a lower rate has the effect of reducing the monthly cost for principal and interest.
How few?

Just look at what HUD now says in its latest update regarding the FHA streamline program:
Streamline refinances are designed to lower the monthly principal and interest payments on a current FHA-insured mortgage and must involve no cash back to the borrower, except for minor adjustments at closing not to exceed $500. Streamline refinances can be made with or without an appraisal. FHA does not require repairs to be completed (except for lead-based paint repairs) on streamline refinances with appraisals; however, the lender may require completion of repairs as a condition of the loan. The mortgage amount limits may never exceed the statutory limits except by the amount of any new upfront MIP.

Streamline refinance processing and underwriting instructions are described in HUD Handbook 4155.1 REV-5 1-12 but are generally as described below. The mortgage amount limits may never exceed the statutory limits except by the amount of any new upfront MIP.
A. Streamline Refinances WITHOUT an Appraisal. The maximum insurable mortgage is the lower of the two calculations shown below:

1. Original Loan Amount: The original principal balance on the mortgage (which will include any upfront mortgage insurance premium) plus the new upfront premium that will be charged on the refinance, or

2. Existing Debt: Add the sum of the existing FHA insured first lien, closing costs, reasonable discount points and the prepaid expenses necessary to establish the escrow account, and subtract any refund of upfront mortgage insurance premiums (UFMIP). The existing first lien may include the interest charged by the servicing lender when the payoff is not received on the first day of the month as is typically assessed on FHA mortgages, late charges or escrow shortages, but may not include delinquent interest.

This mortgage calculation process applies only to owner-occupied properties. Investment properties, even if originally acquired as principal residences by the current borrowers, may only be refinanced for the outstanding principal balance.

The term of the mortgage is the lesser of 30 years or the remaining term of the mortgage plus 12 years.

B. Streamline Refinance WITH an Appraisal (No Credit Qualifying). The maximum insurable mortgage is the lower of the appropriate loan-to-value ratio applied to the appraiser’s estimate of value or the sum of the existing indebtedness and related closing costs and prepaid expenses for the refinance; both are described below.

1. LTV Ratio Applied to Appraised Value: Multiply the appraised value of the property by the appropriate factor as shown in the chart in HUD Handbook 4155.1 REV-5 (1-12) for the property’s value and the State where it the property is located.

2. Existing Debt: Add the sum of the existing FHA insured first lien, closing costs, reasonable discount points and the prepaid expenses necessary to establish the escrow account, and subtract any refund of upfront mortgage insurance premiums (UFMIP) as described below. The existing first lien may include the interest charged by the servicing lender when the payoff is not received on the first day of the month as is typically assessed on FHA mortgages, late charges or escrow shortages, but may not include delinquent interest.

$8,000 Tax Credit to buy a home in 2009

If you are a first time home buyer or you haven't owned a home as a primary residence for the past three years and you or that someone you know is considering buying a home this year as your primary residence, this is the most lucrative year to add to your list of tax deductions you could ask for. This is the year and the reason to be grateful for the administration that is in Washington.

In the real life of monopoly, you will pick up a free $8,000 from the United States government. Free Money as a deduction on your 2009 tax returns.

This is your lucky year to buy a house.

In addition to the $8,000 tax credit, there are grants available to buy houses to stimulate local economies. These are free grants that can be used as down payment money &/or closing costs.

Details of the Tax Credit are below.

2009 First-Time Home Buyer Tax Credit Fact Sheet

Who is Eligible

The $8,000 tax credit is available for first-time home buyers only.

• The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase.

• All U.S. citizens who file taxes are eligible to participate in the program.

Payback Provisions

The tax credit is a true credit. It does not have to be repaid. The only repayment requirement is if the home owner sold the home within three years after the purchase.

Income Limits

Home buyers who file as single or head-of-household taxpayers can claim the full $8,000 credit if their modified adjusted gross income (MAGI) is less than $75,000.

• For married couples filing a joint return, the income limit doubles to $150,000.

• Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit.

• Married couples who earn between $150,000 and $170,000 are eligible to receive a partial first-time home buyer tax credit.

• The credit is not available for single taxpayers whose MAGI is greater than $95,000 and married couples with a MAGI that exceeds $170,000.

• For example, if you owe $5,000 in federal income taxes, you would pay nothing to the IRS and receive a $3,000 payment from the government.

• If you are due to receive a $1,000 tax refund from the government, your refund would grow to $9,000 ($1,000 plus $8,000 from the home buyer tax credit).

Effective Dates for the Tax Credit

First-time home buyers would receive an $8,000 tax credit for the purchase of any home on or after January 1, 2009 and before December 1, 2009. To qualify, you must actually close on the sale of the home during this period.

• Buyers can take the tax credit on their 2008 or 2009 income tax return.

Tax Credit is Refundable

A refundable credit means that if you pay less than $8,000 in federal income taxes, then the government will write you a check for the difference.

Types of Homes that Qualify for the Tax Credit

All homes, whether single-family, town homes or condominium apartments will qualify, provided that the home will be used as a principal residence and the buyer has not owned a principal residence in the prior three years. This also includes newly-constructed homes.

For more details on the tax credit, go to www.federalhousingtaxcredit.com

Got a Broken ARM (Adjustable Rate Mortgage)....Let Me "Fix" It!

Are you one of the millions of homeowner's who purchased or refinanced a home in the past couple of years with an Adjustable Rate Mortgage (ARM)? This is a Consumer Call to Action. Don't wait to become a Foreclosure Statistic!

For many who obtained one of the many types of ARM's there may be a "day of reckoning" on their horizon. Their payment adjustment notice may visit them like a thief in the night with a monthly payment increase that may be in the hundreds of dollars.

Not a week go by that I get people telling me, "I don't think anyone else has an interest as high as I do". I then ask what that rate is & they tell me either 12 or 13%. Without fail there are many people that have been stricken with the modern day financial influenza of our nation. Families are being broken and many need help.

Don't wait to get help .... start doing your "home work" right now. I encourage you to pull out your paperwork and review the terms of your Adjustable Rate Mortgage. Determine what, how much and when your present loan terms may change. You could be in for a "rude awakening". Presently, there is a housing glut in many areas of the country (ie. Florida, California, Nevada, Arizona and many other locations). If so, this probably represents a buyer's market with declining values. Don't allow a reduced property value to impact on your ability to refinance or the quality of terms that you can obtain.

If you are a homeowner that is experiencing difficulty in meeting your monthly mortgage obligation for this or any other unexpected reason don't ignore the problem.....it will not go away!

There is a high likelihood that you are eligible to refinance into an FHA loan to not that has a fixed rate for 30 years. Most people don't know they may be elegible to qualify, even for credit challenged borrowers. If you have 2 years of job history (even if you have worked for different companies) & you have pay stubs (& possibly your tax returns) to prove your income.

If you cannot refinance & that is not an option based on your circumstances, then call your mortgage lender/holder and explain your circumstances and ask for their assistance. This is an option if your starting to go downhill & there is no way to refinance at all. Some banks are more willing to cooperate if you initiate the dialogue. Some, like Countrywide, are a pain in the back side to get anywhere as they want to own your house and not help you out.

If you believe that you are at a point of no return....work on the sale of your home. A foreclosure will haunt you and your credit for several years. Call your Realtor and start the process of getting your home on the market. Time is of the essence! If you owe more than what you can sell your home for I have friends that are Realtors that are very experienced in "Short Sales".

How do I know if I qualify for an FHA loan?

How do I know if I qualify for an FHA loan?

The general overall topics to qualify for an FHA loan are:

• Primary Residence – The house must be the one you live in, not an investment property. You used to be able to get an FHA loan for an investment property, but not anymore.

• Income – 2 year history of income being proved through any of the following methods
• 2 Years of tax returns
• Cancelled checks
• Pay stubs

• Employment History / or history of income / stability history & likelihood of future income
• Letter from social security or which ever entity that issues your checks / direct deposits.

• Debt to Income Ratio(‘s)

• Credit Score (a minimum of 580 is now being looked at)

• Down Payment of 3% for a purchase
• This can be gifted from a family member or from a qualified foundation

• FHA Secure doesn’t need to have any equity as it needs to be a 1^st lien as long as the current 2^nd mortgage will subordinate as a 2^nd behind an FHA 1^st mortgage.
• Loan Amount – Read our article of loan limits for FHA Loans. In short, each county in the country has a set limit for the maximum dollar figure that will be lent out in that county for any given property based on the appraised value.
• I.E. The maximum loan in Salt Lake County, Utah for a single (1) family property is $729,500. A home owner (if they qualify for the loan) can get a loan up to $729,500 in Salt Lake County. In Davis County, Utah the maximum loan limit for a single (1) family property is: $417,000
• To check what the Loan Limits by County see: http://www.fhaoutreach.com

• Credit – No judgements & collections
• You can pay off a collection on a refinance. You cannot buy a property & get a new loan with a collection on your credit.
• If you have been in CH 13 Bankruptcy for 12 months you qualify to refinance & payoff your BK 13 if you have sufficient equity in your property.

If you have any questions feel free to contact us.