Are FHA Loans for Suckers?

In this class James discusses the pros and cons of using FHA loans.

Are FHA Loans For Suckers?

• Their equivalent of Private Mortgage Insurance (PMI)–Mortgage Insurance Premium for FHA loans—is usually higher compared to PMI on conventional loans
• Their Private Mortgage Insurance never goes away
• You got to sell or refinance into a different loan to get rid of it
• Mortgage Interest Rates can be higher than for jumbo loans or VA loans
• There are lower down payment programs than just 3.5% down like conventional 3% down payment, VA and USDA nothing down loan programs as just a couple examples
• So, are FHA loans for suckers?
• Well, not so fast… let’s look a little closer at these issues AND some of the other benefits of FHA loans…

Private Mortgage Insurance Primer

• Since a hefty part of the discussion of FHA loans involves Private Mortgage Insurance (PMI) I’ll give you a very brief introduction about PMI here
• I’ve taught 2-hour classes just on PMI and will probably do another episode about them soon
• What is it?
• Insurance you pay for to benefit the lender to protect them in case you default
• Often can be paid up-front, monthly or both
• How much is it?
• Lots of factors determine the rate.
• Except with FHA loans they are usually standardized for everyone but can vary depending on the term of the loan you choose and the amount you put down.
• When do you typically need to pay it?
• Less than 20% down
• Some exceptions like VA
• 3 choices: monthly, lender-paid or one-time up-front
• Can increase the interest rate and pre-pay it upfront.
• Often call this “Lender-Paid PMI”
• For FHA, there is both a one-time up-front payment and an on-going monthly premium payment
• They call the one-time up-front payment an “Up-Front Mortgage Insurance Premium” and the monthly Private Mortgage Insurance Premium a “Mortgage Insurance Premium” or MIP for short
• The Up-Front Mortgage Insurance Premium is usually 1.75% of the loan amount.
• Can finance this into the loan.
• The monthly Mortgage Insurance Premium is usually .85% of loan balance when putting 3.5% down with a 30-year loan.
• It can change if you do a 15-year loan or put more than 3.5% down

Might Be Different

• Things change over time and from lender to lender
• Always check with your lender to verify what I am telling you
• Just because one lender you talk to says it can’t be done, it does not necessarily mean that it can’t be done
• Different lenders have different loan programs
• Different lenders look at things differently and may be willing to do something that all other lenders won’t
• We’ll primarily be discussing what I believe most lenders will do
• Sometimes lenders have overlays or internal policies that are more restrictive than what the loan program requires
• For example, the FHA loan program may require a credit score of 640 but the lender may have an overlay that says that they’re not going to originate FHA loans unless the borrower has a credit score of 660.
• If you went to another lender, they may be willing to originate the loan with the program minimum of 640.

Interest Rates Comparison of Various Loan Products

Mortgage Interest Rates

• I’ll show you an email I received from a credit union (local to where I live)
• This is not an offer of that rate to you
• Rates can vary
• Over time (and even throughout any given day)
• Based on the loan product
• Your credit score… although typically FHA rates do not vary based on credit score
• This does NOT include the monthly Private Mortgage Insurance/MIP premium

Mix of Loan Types

FHA Easier to Qualify For

FHA Credit Scores

Average Credit Scores

Allows You To Buy Multi-Family Properties

• One of the advantages of using FHA loans is that it allows you buy duplexes, triplex or fourplexes in addition to single family homes with just 3.5% down
• As of the time of creating this presentation there is not a conventional loan option that allows you to buy a duplex, triplex or fourplex as an owner-occupant for less than 15% down (and that’s for duplexes only).
• To buy a triplex or fourplex as an owner-occupant where you move into one of the units with conventional financing you’re looking at 20% down payment.
• To buy a duplex, triplex, or fourplex as an investment (where you don’t move into one of the units) is 25% down
• So, being able to buy a duplex, triplex, or fourplex as an owner-occupant with as little as 3.5% is amazing.
• Maybe… just maybe… FHA loans are not for suckers after all, right?

PMI Lasts Forever

• Typically, if you get a conventional loan (not an FHA loan) and put less than 20% down, you’d be required to pay Private Mortgage Insurance.
• If you opted to pay that monthly, the monthly PMI payments last until you have 20% equity in the property then you no longer pay the monthly PMI payment.
• However, that’s not the case with FHA loans.
• If you’re doing an FHA loan with 3.5% down, the monthly Mortgage Insurance Premium (MIP) never goes away even when you’ve paid down the loan and property values have gone up such that you have more than 20% equity in the property.
• If you put more than 10% down, MIP goes away after 11 years

One FHA Loan At A Time

• There are exceptions, but typically you can only have one FHA loan at a time
• So, it will be hard to Nomad™ with more than one FHA loan
• Making it hard to buy more than one multi-family property as a Nomad™ without also being able to use VA financing or alternating purchases with your spouse.
• Also, some underwriters will not approve of you buying a multi-family property after you’ve been living in a single-family home

Return on Investment from Debt Paydown

So, are FHA loans for suckers?

Cons

• Higher PMI
• Lower than 3.5% down payment options available with other loan products
• Up-Front and monthly PMI (MIP)
• No benefit for higher credit score for PMI
• PMI lasts for the life of the loan
• Sometimes higher effective interest rate (when PMI is included)
• Can typically only have 1 FHA loan at a time
• Must owner-occupy

Pros

• Multi-family properties with just 3.5% down (without VA benefits)
• Duplexes, triplexes, fourplexes
• Huge plus for House Hackers and Nomads™
• Lower credit score required
• Higher Debt-To-Income allowed
• Easier to get with bankruptcy or foreclosure
• This is often the loan combined with down payment assistance programs
• If available in your market

Resources Mentioned

In this presentation James mentions the following resources:

• The Ultimate Guide to Private Mortgage Insurance – A full class on Private Mortgage Insurance.