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
* * *
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.
