Let's Compare FHA vs. Conventional Mortgages Today

Today’s blog is a guest blog from Dan Hapner, the Director of Mortgage Sales at Meriwest Mortgage.

With home sales continuing to grow and the expectation that interest rates may be on the rise, let’s pause to consider the best loan products we might use for our next home purchase. FHA is a popular option for some families and I think it is important we understand the distinct differences between this form of government sponsored loan and a regular conforming conventional loan that is underwritten according to guidelines provided by Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corp).

FHA Loans

The FHA, Federal Housing Administration, has been helping Americans own homes for 70 years. The FHA guarantees or insures home loans made by their qualified member lending institutions. This allows homebuyers to access a home without having to come up with a large downpayment. Typically, conventional mortgages require a 20% downpayment. FHA guaranteed mortgages can be made with as little as 3.5% downpayment! That downpayment can be 100% gifted to the borrower. There is no “seasoning” requirement of having the funds on hand 90 days prior to the purchase.

FHA guaranteed loans can be adjustable or fixed. They also have two graduated payment programs that can help families get into their first home at a reduced monthly payment that will grow as their income grows. Most of the FHA guaranteed loans are made at a fixed interest rate and is typically lower than a conventional loan.

How does it rate as a first time homebuyer loan? Not bad, but the news is not all good either.

The Good: FHA requires a FICO score of 580 for the 3.5% low downpayment program.

Many participating FHA lenders require a FICO score of at least 620 in order to qualify for an FHA home loan. Just because the FHA minimum is 580 does not mean a particular bank is willing to issue credit to those with that score--the FHA loan program is a voluntary one, lenders are not required to participate, and the FHA cannot force the bank to lower its FICO requirements. These FICO scores are significant as most conventional loans require a FICO score of 680 or better. Another advantage for FHA is the maximum loan limit is $625k vs. $417k for a conventional loan. FHA maximum’s are increased in areas with high priced housing such as the San Francisco Bay Area to $729,750. FHA loans often allow for a higher debt to income ratio, making more borrowers eligible.

The Bad: For most FHA loans, the sellers will pay the closing costs. This can be an impediment to selling to a particular buyer if they intend to use an FHA loan. Closing costs can be very expensive for the seller and make an FHA loan difficult to use for the buyer. This is particularly true in the case of a short sale home if the sellers don’t have a lot of cash on hand or equity. The sellers need to be flush with cash or equity in the case of a buyer with an FHA loan.

First time homebuyers need to be aware of the costs involved in using an FHA loan to finance your home purchase. As the loan is not a conventional loan, it is going to require mortgage insurance. FHA mortgage insurance will cost the buyer 1.5% of the total loan amount upon closing and then 0.5% of the loan each year to pay for the mortgage insurance. On a $400,000 loan that would mean a mortgage insurance cost of $8,000 in the first year; the upfront insurance payment of $6,000 at closing and then $2,000 the first year in annual premiums. The mortgage insurance stays in effect for the life of the loan. The only way to eliminate the insurance is through paying off the loan or through refinancing.

Another issue involved in FHA lending is the approval of the property. The property must meet FHA standards. If the collateral is not up to FHA standards, the seller must pay for repairs. This can be an impediment for sellers with homes that need a little work. If a house is being sold “as is,” it may not be a good target for an FHA type loan.

Time is also a factor. FHA loans typically take longer to process than a similar conventional loan.

Conventional Loans

Most of the mortgages made in the United States are conventional mortgages. These are used for purchase and for refinancing an existing loan. They can be an adjustable loan or a fixed rate type of loan. As most lending institutions offer conventional home financing and set their own interest rates, borrowers can have a wide range of lenders and interest rates from which to choose. FHA loans are limited to approved lenders.

Generally, conventional mortgages require a 20% downpayment for home purchase transactions. A purchase with less than 20% down would require private mortgage insurance (PMI) be paid for by the applicant. PMI generally costs 1% of the total loan amount annually. The insurance payment is usually included with the loan payment. A $400,000 mortgage that requires PMI would have a charge of $4,000. That would add $333 to each monthly payment.

Conventional loans also require an applicant have a 680 or better FICO score. This is higher than an FHA loan, but less than is required for most consumer loans which is 740.

There are fees involved with conventional loans, such as processing fees, application fees, and appraisal fees. But if one is willing to pay a slightly higher interest rate on their loan, they can avoid fees altogether. By paying an additional point or one percent of their loan amount upon closing, they can pay down their loan interest rate and possibly save themselves thousands of dollars over the life of the 30 year loan. Conventional loans have a lot of options when it comes to interest rates and fees.

There are local government and non-profit programs that can provide some downpayment assistance and thus decrease the downpayment needs. As an example, Meriwest Mortgage works with the Housing Endowment and Regional Trust in San Mateo County, HEART of San Mateo. They offer homebuyers up to $78,225 in downpayment assistance and that can offset up 15% of the purchase price with just 5% down. These downpayment assistance programs can be used to eliminate the need to pay for mortgage insurance and can be very helpful in making a home purchase more affordable for first time homebuyers.

As conventional loans are offered all across the country in every municipality, there is a great many lenders from which to choose. Competition is your friend and keeps fees down and processing times speedy. Most of the HEART Program loans are processed in less than thirty days and are often completed and closed in only 20 days!

As we saw with the need to provide PMI in cases of small downpayments, there are some warts on conventional loans. As these loans are sold on the secondary market to Fannie Mae and Freddie Mac once processed and booked as a mortgage backed security, borrowers have fewer options in regard to default. What this means to a borrower is the issuing lender does not own the loan and thus has no control over the default process and cannot make arrangements with the borrower to reduce interest rates, payment forbearance, etc. Currently, these borrowers are being encouraged to take part in the HARP and HAMP Government Programs to help families in foreclosure.

In conclusion

Let’s keep in mind that the United States Government does not make home loans. They guarantee or insure home loans. What this means is the lender is insured against loss by default of the borrower. It does not insure the borrower or guarantee the borrower against default in any way.

Do you have more questions about a future home purchase or a refinance of your existing loan? Please contact Dan at dhapner@meriwest.com.

Meriwest Mortgage and Meriwest Credit Union are Equal Housing Lenders.

Meriwest Credit Union deposits are insured up $250,000 by the NCUA

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Our next set of workshops will be taking place at our Sunnyvale Financial Center at 563 E. El Camino Real in Sunnyvale, next to Togo's Sandwiches. To attend, please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328.

Auto Finance 101 - Learn the in's and out's of purchasing a car. Research your car and your financing. Learn how to make the deal and avoid dealer tricks. Negotiate your purchase price, interest rate, and terms.

6:30PM - 7:30PM on Oct. 16th

Sunnyvale Financial Center

Credit Myths and Repair - Learn how to access your credit report from all three credit bureaus and your credit score for free. How do inquiries effect your score? What happens to your credit after you pay a collection? Have a late payment? Get a divorce?

6:30PM - 7:30PM on Oct. 23rd 

Sunnyvale Financial Center

Meriwest Credit Union

CAR SALE!!!

 November 9th and 10th at the Meriwest Credit Union Main Office 

5615 Chesbro Ave, San Jose CA 95123

Come to see our wide selection of late model, gently used cars offered at bargain prices by our MCU approved dealers.

Going from Bad to Worse – Collections are a Curse!

What do you know about collections? I get a lot of questions like: How long can they stay on my credit report? What effect do they have on my credit score? What’s the best way for me to pay them off and get them out of my life? 

Do you wonder about these things? A lot of folks do. Every day I get questions from our members about collections and how they affect their credit. Let’s see if I can give you some answers!

A collection takes place after we have been delinquent on a payment. That payment can be on a utility, a loan or a payment for other services where you may be billed later like a carpet cleaning. Technically, you can be late up to 89 days on your utilities like your water bill, heating bill, or even your phone or cellphone bill, even that invoice from the carpet cleaner. So long as you pay it by the 89^th day, no one at the credit bureau needs to know about it. Sure, the water company might charge a late fee or the cellphone provider might temporarily cancel your internet service, but it will not appear on your credit report and cost you a reduction in your credit or “FICO” score.

But, if you allow that bill to go unpaid that additional day so that is it 90 days late, your credit score will suffer. As a general rule, most businesses turn unpaid debt that is 90 days old to their internal collection departments or they may sell unpaid debt to a collection agency for further collection. What that means to you is a severe beating of your credit score. If you had an excellent score, it is now just okay. If you had a good score, your score has dropped significantly. An unpaid collection on your credit has the same power on your score the first day as it does seven years later when it expires and drops off your report! Unpaid collections drag your score down and prevent you from accessing future credit on good terms and rates.

My debt went 90 days delinquent and now a guy named Ralph is calling me from the collection agency. What can I do to stop this? You have a right to privacy and can write them a letter requesting they stop calling you. That’s the law and it works! Write the letter telling them to stop calling you and send it certified mail to the collection agency. Then, they can only call you to tell you they will stop calling or if they decide to take further legal action. Otherwise, all phone contact stops. Remember to keep a copy of your letter!

However, the best recommendation is to pay it and get it out of your life. This sort of debt is not your friend. Once you pay a collection, it changes from an upaid, also known as an open collection, to a paid or closed collection. Immediately upon paying it, your credit score will bump up a bit. As time goes by and the debt is 24 months, 36 months, and further into your past, you will see your score improve. With the collection’s status changing from an open/unpaid collection to a closed/paid collection on your credit report; it will still be a negative item, but much, much less than a collection that is unpaid. It will remain on your report for the balance of the seven years after you have paid it; i.e. if you pay it after two years, it will show as a paid collection for the five remaining years. 

With older collections some agencies may be inclined to provide you a fairly steep discount to pay them. Collection agencies buy your debt at a discount. You just have to ask for a lower pay off amount and start negotiating with the representative. If you decide on an amount, get it in writing and attach your check to it when you pay it. Then you have a contract with the agency. Do not send any money until you get your agreement in writing. 

Also, good debt offsets bad debt. This means that if you have other credit obligations besides that one debt that went bad, each time you make a payment on them you will improve your credit position. On time payments and keeping your debt balances low and under control are the keys to improving your credit score.

  

Questions? Ask the Your Credit Union Guy, Greg Meyer at gmeyer@meriwest.com

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 Our next Credit Myths Financial Workshop will take place this Wednesday Sept. 25th at our Main Office at 6:30pm. If you wish to join us, please contact me at gmeyer@meriwest.com or 408-365-6328 to reserve a spot. Don't be shy. We have space! 

Our October Workshops will be held at our Sunnyvale Financial Center on El Camino @ Fair Oaks in Sunnyvale. 

Auto Financing 101 

October 16th - 6:30pm to 7:30pm

Learn how to plan for, research, and negotiate your deal and financing for your next car. Be a step ahead of the car dealer. Take this class! 

Credit Myths

October 23rd - 6:30pm to 7:30pm

What are the top ten myths of credit? We will tell you and reveal the truth behind these myths. 

Both will be held at our office at 563 E. El Camino Real, Sunnyvale CA

Please RSVP with me at gmeyer@meriwest.com or 408-365-6328 to reserve your spot.

Money Scams – Everyone wants your Money!

There are a lot of scams out there. People use them to separate you from your goods and money. One of the latest in the San Francisco Bay Area is the “Snake Scam.” This is where a nice looking lady in an Animal Control uniform appears at your door and tells you that there is a snake infestation in the neighborhood. She needs to show all the members of the household where she will set the traps. Once the lady has you in your backyard, her associate is pillaging your home for cash and jewels. They can also present themselves as a gas & electric worker or a cable TV installer. Ask for ID from anyone attempting to enter your home to perform services. If you are suspicious, call the company and check on them before allowing them in. If they are scamming you, they will run away.

Another popular scam used on older people is the “Lottery Ticket Scam.” Two people approach the “Mark” and one will say he has the winning lottery ticket. He will have a ticket with the winning numbers purchased on the date of the lotto drawing. However, the time is after the drawing, but the victim does not usually see that. The scam is that the person with the ticket is an undocumented alien and cannot cash the ticket and needs a citizen to cash it for him. The victim is asked to put up thousands in “good faith” money in cash. Yes, eventually the bad guys disappear with the good faith money and the Mark, our victim, is left holding a worthless lottery ticket.

Let’s not be victims. Let’s do some things that will protect us. Sometimes, little things make a big impact.

1. On all debit and credit cards, take a permanent marking pen and write, “Ask for ID” in the signature portion on the back of all your cards. Don’t sign it. You are only giving the bad guys an example of your signature to copy and forge. The idea is when a thief is buying a big ticket item he gets stopped when asked to present ID. Per Visa, a merchant may ask you to sign the card, but cannot refuse your transaction if you produce valid government identification such as a Driver’s License or State ID Card.

2. Utilize a good firewall and antivirus program to protect your computer and any data from hackers and spammers. A good firewall makes your computer anonymous to the internet, meaning your computer and your transactions cannot be seen by hackers. Good internet security software might cost as much as $60. Never download or click on links from someone you do not know. What is your peace of mind worth today?

3. Consider electronic banking and bill pay to avoid ID Theft. -Paying your bills with a check provides a thief with your name, address, bank routing number and your account number, as well as an example of your signature. Online Bill Payments are electronic and leave nothing like that to be used against you. Plus they save on the cost of checks and postage.

Utilize e-statements instead of a paper statement mailed to your mailbox. It’s easy for thieves to access your mailbox during the middle of the day. E-statements provide access to your account transactions and details quicker and are more secure. Not to mention they save on paper and postage, so you’re helping the environment. And if you need a copy, you can download and save your statements or print them from your home computer.

Consider “Alerts” with online banking. Setting up alerts can provide you with information on what’s happening to your accounts at any time, including transfers, withdrawals and deposits.

4. If you don’t want to use online banking, don't mail your bills by sticking them in your mailbox to be picked up by the postman. Thieves patrol streets on the 3rd thru the 5th of the month and after the 15th to fish for money in bill payment envelopes. Mail your bills in a U.S. Postal mail box or at the post office only!

5. Shred old banking documents you no longer need. It keeps your personal data away from thieves. If you don’t have a shredder, I would bet your local credit union branch will help you by taking a small stack of documents and adding them to their secure shredding. Also, many office supply stores offer secure shredding at low prices.

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Free Financial and Business Workshops presented at Meriwest Credit Union

Writing an Effective Business Plan and Access to Business Capital

• Write a business plan that gets noticed!
• Gain an understanding how lenders view business loan applications

Sept. 12^th – 6 PM

Meriwest Credit Union Main Office

5615 Chesbro Ave

San Jose CA 951123

Please RSVP with Dan Golding at dgoldin@meriwest.com or 408-632-4180

Real World Budgets for Young Adults

• For Teens and College Students: Learn about money while building your post college budget!
• Start managing your money today!

Sept. 18^th – 6:30 PM

Meriwest Credit Union Main Office

5615 Chesbro Ave

San Jose CA 951123

Please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328

                   

Credit Myth and Repair

• Learn the Top Ten Myths of credit that are not necessarily true!
• Learn how to correct errors on your credit report.

Sept. 25^th – 6:30 PM

Meriwest Credit Union Main Office

5615 Chesbro Ave

San Jose CA 951123

Please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328

5 Behaviors of Highly Effective Savers

Today's blog is a guest blog from the team at Debt.Org. Special thanks to the writer, Alanna Ritchie.

Managing personal finances successfully requires more than understanding numbers and having good accounting skills. In order for debt management solutions to be effective in helping you get out of debt and stay that way, they must be supported by changes in behavior.

Adopting five behaviors of highly effective savers can help to ensure that once you gain control over your debt and finances, you'll be able to keep that control in the long-term. Try incorporating these behaviors into the way you operate your personal finances, as well as your life in general, and you'll be sure to see positive results:

Set Incremental Goals

Setting a huge, generalized goal may end up overwhelming you, rather than moving you forward. Take that big goal – to get out of debt, perhaps – and break it into smaller, very specific steps with a workable, realistic time schedule. For example, when preparing for an upcoming big expense, set a weekly goal for saving for it.

Be a Good Record Keeper

Keeping track of what comes in and what goes out assists you in understanding the effects of your financial choices. When you are working to regain control of your finances, being a good record keeper will show you the positive results of your efforts, supplying even more motivation to keep up the good work.

3.       Own Your Situation and Your Choices

If creditors are pressing you or your credit card interest rates have skyrocketed, the bottom line is that such things are a natural consequence of your past behavior. Accept it, own it and deal with it, rather than being angry at the people calling or your credit card company. It will reduce the stress in your life and help you to be more focused on what has to be done. Maybe think of joining a credit union. They normally have fewer fees, lower interest rates on loans, more services and higher dividends on deposits than banks.

4.       Prioritize Properly

Place long-term well-being over instant gratification. Expand your vision beyond what you want in the moment to what you hope for and really need in the future by putting money in savings before you spend any for pleasure. Apply this concept to credit card use. Make financial choices—like putting money in savings or making a credit card purchase only if you know you will be able to handle payments—with the future in 

mind.

5.       Evaluate and Adjust as Needed

Effective savers are good at evaluating their own behaviors and situations and making the necessary improvements. They strive to be honest about their weaknesses and work hard to improve them. That is because they keep their goals and the big picture clearly in mind.

When you make these behaviors a part of how you manage your life and your finances, you'll be able to make the most out of the opportunity that debt settlement or other debt-related solutions offer you. All the work you do to eliminate debt will be wasted if you don't supplement the effort by developing behaviors that will keep you from returning to that position again.

Alanna Ritchie is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.

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Our next Free Financial Education Workshop is this Wednesday. Credit Myths and Repair will explain the top ten myths of managing credit. We will address balances, payments, collections, and judgments.  The workshop is fun and informative. You will learn more about credit than you had ever imagined!

Credit Myths and Repair

6:30 PM - Wednesday, August 28th. 

5615 Chesbro Ave, San Jose CA 95123

To RSVP, please contact gmeyer@meriwest.com or call 408-365-6328

Incoming Freshman: Easy Stuff for Managing your Money

Cool, you have graduated high school and have moved on to an institution of higher learning aka a university or community college. Maybe you’re self funded, parent-funded, or using a variety of grants and/or student loans to make your ends meet. Over the next four years, you will likely be handling more money than at any other time in your life so far.

As you start your classes, you will find there are a lot of demands on your wallet. Books and tuition are a large part of this demand. But it is managing your living expenses and personal entertainment that calls for the most attention. Take some advice and don’t throw money out a window!

1. Open a checking account at a credit union.
• Why a CU? No monthly service charges. Reduced fees. More Free ATM’s.
• Use your online banking to track your checking usage. Don’t be afraid to check your balance daily on your phone, laptop, or tablet, it’s free!
• Open up a savings, too. Set up a small amount to automatically transfer to the savings monthly. You may not miss the money but it will be there when you need it. $20 a month can be a lifesaver down the line.
2. Organize: Create some files for your important documents and statements. The basics will include:
• College File: This file has your documentation for your financial aid; loans or grants. It should hold the receipts for your tuition payments.
• Banking File: This file has all your bank statements (if you are not using your online banking). If you have a credit card you are managing, the statements would go here as well.
• Bills: This file is where your monthly/quarterly records of bills shall be filed away; i.e. rent, cable bills, cell phone, heat/electricity.
• Find a locking cabinet at a yard sale or second hand store to save your documentation. A simple lock is often all it takes to keep honest people honest and discourage would be identity thieves.
3. Budget: You have a limited amount of money each semester from your student aid grant or loan receipts.

·        Use any money left over after paying your tuition and book expenses to help pay for your living expenses. That money left over after paying your school expenses is not a bonus to be spent at parties and spring break. It is what you have to feed and cloth yourself.

·        Take the amount and break it out in even amounts for the next few months until your next aid payment is expected.

·        Plan for your expected expenses by creating a budget for each month. You don’t have to wait until October to create the budget for October.

·        Saving money should be the second item in your budget after paying your rent. See #1.

4. Avoid owning a car. This may sound crazy in “Car Culture” California, but in the big picture, owning a car is a major expense.
• Paying for gas, insurance, maintenance, and repairs can put a major crimp in your happy fun time at college.
• Colleges like San Jose State are close to all manner of stores and restaurants. There are lots of great shopping and eating options within easy walking or bike riding distances.
• Besides, municipal transportation passes/bus passes are so much cheaper than gas, tires, and car insurance!
5. Don’t get talked into applying for a credit card. You don’t need it.
• Of course, if Mom or Dad set you up with a card that you will manage together, that is a different matter. That card is in your possession for emergencies more than likely. Emergencies involve medical issues, police issues, fire, or floods. Running out of beer or pizza does not constitute an emergency. There is no such thing as an emergency night at the movies or an emergency concert.
• Manage the card well and, if your name is on the account, you will build a strong credit record while you are enrolled in college.
• Mismanaged cards don’t just get you into expensive credit card debt at high interest rates, it can affect you emotionally through depression and that can affect your studies.

Some of these suggestions may make your life easier. Some of them may save you money. The final word is that only you can make decisions and manage your finances. No one will do it for you. Do it right and you will thrive. I don’t like to think about the alternative! 

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Our next free financial literacy workshops are coming August 21st and 28th. 

• The 21st we will have our Real World Budgeting Class for Teenagers. The class is held here at our main office in our Training Center at 6:30pm. Click her to RSVP! 

• The 28th we will be offering The Myths of Credit and Credit Repair. This class will also be held here at our main office in our Training  Center at 6:30pm. Click here to RSVP!