Comparison: FHA v. Conventional

I’ve beaten this idea like a dead horse over the past two plus years, but it is worth repeating again: Do not get an FHA loan unless it is absolutely necessary!

By absolutely necessary, the following assumptions apply:

1. Credit scores are below 680
2. Your total revolving and installment debt exceeds 45% of your gross monthly income
3. Your current FHA loan closed before June 1st, 2009

If none of these apply to you or your clients, for that matter, then the loan that you take for your property should be a conventional loan.

On April 9th, FHA increased its upfront mortgage insurance premium to 1.75% and its monthly mortgage insurance to 1.25% for borrowers putting 3.5% down (http://portal.hud.gov/hudportal/documents/huddoc?id=12-04ml.pdf).  It has become increasingly more expensive to have an FHA loan.  It continue to go that route as there are provisions to allow the monthly mortgage insurance premiums to increase up to 1.50%.

As a company we’ve advocated conventional loans with single financed mortgage insurance premiums.  These loans are designed to help borrowers with good credit scores (720 and above) and money for a down payment (5.5% in most cases).  The single financed premium allows borrowers to pay and then finance a one-time mortgage insurance premium so there is no extra monthly mortgage insurance expense.  In comparison to current FHA mortgage insurance premiums this saves borrowers approximately $175-$200/mo on a $200,000 mortgage.

The biggest hurdle to overcome in this program is the down payment of 5.5%.  With FHA premiums going up yet again, we now are advocating an additional program where a borrower can put as little as 3% down (.5% less than an FHA loan) and pay a borrower-paid monthly mortgage insurance premium (see rate card: http://www.mgic.com/pdfs/71-61210_bpmi_monthly.pdf).

I’m assuming some borrowers are quickly sold on the low rate quotes that FHA loans can offer or aren’t provided alternatives because FHA is the only program their banker or broker knows, much like the pre-2008 mortgage market when the no-income/no-asset and stated income/stated asset loans were the only things that some brokers/bankers could do.

As an exercise, let’s play that little rate game:

1. Borrower A is offered a current FHA market rate (assuming good credit and all that stuff): 3.75% (5.244% APR)
2. Borrower B is offered a conventional loan with 3% down (assuming good credit and all that stuff): 4.25% (4.912% APR)

At first glance, Borrower A is getting a great deal!  However, they will wind up financing 1.75% more in upfront mortgage insurance and pay .15% more in monthly mortgage insurance.  On a 200,000 loan, the FHA loan costs $3/mo more, not a big deal, but after 5 years because of the upfront mortgage insurance the borrower will also owe $4,000 more than they would with the conventional loan and they put $1000 less as a down payment!

Even though the payments seem minor, the cost of the life of the loan is significant.  Call us today at 732-292-1477 or visit us on the web at www.assuredmortgages.com.  If you are in Ocean/Monmouth county, you can also hear our radio ads the first two weeks of the month on WRAT 95.9FM

The 100k+ Household

In the past few days I’ve been thinking about mortgage insurance and how it affects people.  For the most part, borrowers can’t stand the idea of mortgage insurance and want to avoid it like the plague.  The thought process is since it doesn’t do anything other than protect the lender, why should I pay it?

From about late 2007-2008, conventional mortgage insurance became too costly because of mortgage insurance companies insuring the sub-prime loans that subsequently went bad.  The alternative for borrowers who didn’t have a 20% down payment was an FHA loan.  The downside to the FHA loan was that there was an upfront mortgage insurance premium and a monthly mortgage insurance premium.  However, it was by far the cheaper option for borrowers looking to purchase a home with a limited down payment.  It also helped those looking to refinance to take equity out of their home that may have lost value.  Quite frankly, it was the loan option that made the most sense for borrowers.

Fast forward to 2011 and mortgage insurance companies have come back into the picture, making conventional loans with less than 20% down an excellent alternative to an FHA loan.  For households with joint incomes in excess of $100,000, a conventional mortgage with a single financed mortgage insurance premium rather than a loan with a monthly mortgage insurance premium is the best option.  Mortgage insurance is tax deductible up to 100,000 for joint income households.  However, it begins to phase out by 10% for every $1,000 over 10%.

Long explanation short, if you have an FHA loan with one of the lower monthly MI premiums (say .50 or .55) and the household income is greater than $100,000, it is time to take a look refinancing into a conventional loan with a single financed mortgage insurance premium.  Right now, mortgage interest is still tax deductible for everyone.  The single financed mortgage insurance premium is a one-time mortgage insurance premium that is financed into the loan amount, thereby avoiding a monthly mortgage insurance premium.  Since the mortgage insurance premium is apart of the total loan amount it will always be deductible.

With rates as low as they are right now, take a look at your household income and your current mortgage to see if refinancing is the right choice for you.  If the household earns more than $100,000 and has an FHA loan, you are paying too much for your mortgage.

www.assuredmortgages.com

Whither FHA?

In October 2010, FHA announced that they were revamping their mortgage insurance premiums.  I actually wrote about this change in April 2010.  At that point there was a provision in front of Congress that would allow FHA to increase their monthly mortgage insurance to as much as 1.55% from, at that time, a current monthly mortgage insurance premium of .55%.  The October announcement stated that effective October 4th, monthly MI premiums would increase from .55 to .90 on any loan to value above 95%.  In addition, the upfront percentage would actually be reduced from 2.25% to 1.00%. 

The immediate effect and spin of this change was that the borrower was financing less.  The claim is undisputable on its own, however, if one were to look deeper at the change they would realize that while the amount they financed went down by 1.25%, their monthly obligation would increase.  For example on a 200,000 loan amount a borrowers monthly obligation would increase by approximately $45 per month. 

Well, FHA is at it again.  In a recent announcement, FHA has decided to increase the monthly mortgage insurance premium 1.15% from .90%.  Now a 200,000 loan amount carries an addition monthly payment of $42 per month above the original increase of $45.  All told, the difference between FHA financing as of April 18, 2011 versus FHA financing prior to October 4, 2010 is $87 per month.  Additionally, since Congress granted the authority to FHA to increase their premiums to 1.55% you can guarantee that it will hit mark sooner rather than later. 

What does this mean for the consumer?  Well, it shrinks the borrower pool because it makes it harder to qualify because of the increased debt service.  It also makes a FHA loan a lot less desirable when compared to conventional financing with mortgage insurance.  It is my belief that FHA is doing exactly what conventional mortgage insurance companies did immediately following the subprime fallout: they are increasing their premiums significantly enough to reduce their market share.  FHA guarantees too many loans right now and these mortgage insurance increases are designed to reduce that portfolio.

In no way does this mean that a FHA loan is a bad loan or if you currently have a FHA loan you should get out of it.  It is/was a great loan product that now has competition from conventional mortgage insurance.  For the past 8-10 months I’ve been telling my borrowers, if they qualify, that a conventional loan with mortgage insurance is the far cheaper option and better loan product.  The same 200,000 loan amount would require a 5% down payment and eliminates a monthly mortgage insurance premium with a single financed premium of 1.75% of the loan amount. 

Compare it this way:

• Conventional Loan (Single Financed MI premium):     1225.07/mo
• FHA Loan Prior to April 18, 2011:                                        1367.54/mo
• FHA Loan After April 18, 2011:                                              1409.62/mo

The conventional mortgage insurance option wins out in every way possible with the exception that you are required to put an additional 1.5% of the purchase price down.  After April 18th, that $3,000.00 difference in down payment is made up after 16 months of payments in a conventional loan.

For some companies it will be business as usual and the MI increases for FHA will be passed along to the consumer, unless you are with a company like Assured Mortgage Bankers Corp who has the expertise and product knowledge to put you in a loan product that best suits YOUR needs.

Assured Mortgage Bankers Corp

Assured Mortgage Bankers Corp offers a variety of mortgage products to suit your individual needs. Visti us @ http://www.assuredmortgages.com

Back to Blogging

Wow, what a busy 2010!  Mortgage rates fell to historic lows and we took advantage with a flurry of refinacing from June through December. 

During this time, home purchases weren’t as abundant but that seems to be changing in the past month.  Home prices are still low and even though interest rates have back off the the lowest levels they saw in October and November 2010, they are still historically low.  A well-qualified borrower can still get a rate below 5%. 

I’m hoping to update this blog more frequently than I did in 2010 with mortgage-related news.  There are several changes coming on April 1st, 2011 that will affect both borrowers and mortgage professionals that I will more than likely discuss here.

Don’t forget to check our website for daily updated rates and full applications.  I look forward to a healthy and prosperous 2011!

Really Congress? Really?

Effective April 5, 2010, FHA upfront mortgage insurance premiums increased from 1.75% to 2.25%, but monthly mortgage insurance remained at it is current level of .55 on most transactions.  There is a provision currently in front of Congress in the House of Representatives that would allow monthly mortgage insurance premiums to increase to 1.55%.

During the housing boom there weren’t many homebuyers getting FHA financing because mortgage insurance was a bad word.  Why pay mortgage insurance if you could just do an 80/20?  Or a 80/10/10?  FHA gained a foothold after many of those mortgages were subprime loans and borrowers could still get attractive interest rates on 30 year fixed rate loans with low or no credit scores.  Once the Federal government said mortgage insurance was tax deductible for borrowers, only then did people start moving away from 1st and 2nd mortgage combos. 

While this isn’t a proposed change by FHA that will go into effect shortly, it is something that bears watching to see how things play out.  An increase like that would push people back to conventional mortgage insurance and take away a lot of the market share FHA currently holds.  Now, I don’t think this would be a bad thing for FHA since they hold a large part of recent mortgages.

In New Jersey and actually all over the country we have a mortgage insurance provider doesn’t have a declining market provision.  This means that a person can purchase a home with 5% down and get a single financed premium that if they have a credit score of at least 720 would be the same upfront percentage as a FHA loan, but without the monthly mortgage insurance expense. 

Maxine Waters and Congress want rates to stay low, but would allow legislation that could potentially increase the FHA monthly MIP to 1.55%, somehow I don’t understand how this helps borrowers.  On a $200,000 loan, their monthly payment would increase by about $165/month.  I think this is another case in a long line of examples where government has a disconnect with the real world.

First Time Homebuyer Credit and Interest Rates

Well, tomorrow marks the end of the First Time Homebuyer Tax Credit.  If a buyer is not under contract by tomorrow then they aren’t eligible for the $8,000.00 first time homebuyer credit or $6,500.00 move up credit.  If the buyer is under contract on a purchase before April 30th then they have until June 30th to close on the mortgage.  Unless, of course, you were active duty military (see previous post for more information) in the past year.

Many people who once were sitting on the fence about whether to purchase a home have taken advantage of this credit in the past two years.  Right now, it does not look like the Federal Government has decided to extend this tax credit again to keep the vulnerable housing market afloat. 

Economists and traders are worried that there is a possibility of a “double-dip” recession.  While there may be once the tax credit expires I believe there are a few things working in our favor for an economic recovery, albeit slow. 

1. Interest rates should stay at historic lows and the FED seems willing to keep the federal funds rate somewhere between 0-.25%.  There isn’t an overriding concern over inflation which would spur the FED to start raising the funds rate.
2. While the FED has stopped buying Mortgage Backed Securities (MBS), rates have stayed in a narrow range where most borrowers with good credit can obtain an interest rate somewhere in the high 4 – low 5% range.
3. Home prices have stabilized and are now at a point where affordability is coming close to meeting borrower demand.  I see a lot of home purchases in the $200,000 to $225,000 price range. 

Even after the tax credit expires, it is still a great time to purchase a house or refinance your existing home because interest rates are still extremely low.  If you are thinking of doing something to your house or moving within the next 5-7 years, adjustable rate mortgages are EXTREMELY attractive.  Rates are probably a full point to a point and a quarter better than 30 year fixed rate loans. 

Hopefully, the economic recovery will continue and people will continue to take advantage of low interest rates and affordable home prices.  The biggest contribution to an economic recovery will be job creation.  Hopefully, companies continue to hire and create new jobs for Americans and we can all be on the way to a strong economic recovery.

Goldman Sachs…

This past Friday, news broke that Goldman Sachs was under investigation by the SEC (Securities Exchange Commission).  Apparently, there were people at Goldman who were actively shorting subprime loans while telling customers that they should invest their money in these mortgage backed securities.  The accusations state that Goldman advised clients to buy mortgage back securities that were designed to fail. 

According to what I’ve read in the news and have seen on the TV, this investigation has been on-going for about two years or so prior to the SEC bringing charges against Goldman.  On Friday, the market kept improving and improving.  I wasn’t really sure why because I was busy with clients and getting packages ready for closings, but then I saw this news break.  The market rallied on this new financial mess and it looked like the market was poised to continue to rally into this week as the charges and investigation unfolded over the weekend. 

So far, interest rates have remained flat largely due to improving economic indicators.  The economy has been showing signs of improvement recently and rates have inched higher in relation to the news. 

The Goldman Sachs investigation bears watching and I will probably have more commentary as it unfolds further.

Credit Repositories are Selling Your Information

I came home yesterday and found a mortgage solicitation in the mailbox.  I like to take a look at these things to see what my competitors are trying to do to lure in business.  Usually they state something like they can save so much off your payment, refinance to an incredibly low rate of 4.75% with an APR of 6.78%* (*this is in no way, shape or form a rate and APR that correspond to anything offered by Assured Mortgage Bankers).  It is all pretty vague because information used is typically accessed from a search of public records.

I’m fine with this.  They are called PUBLIC records for a reason, they are available to the public.  So therefore, anyone accessing public records can view recorded deeds, mortgages, notices of lis pendes, etc.  They can then take this information and produce general offers to potential clients.  However, the ads have to comply with REG Z and Truth-in-Lending.  This is where a lot of these places have fallen short. 

In past few years we have thought about working with these companies because the ads they put out (they come in the form of mailers with important notice slapped all over it or it looks like something official from the government) look pretty good.  They are done in a way that, if the consumer opens it, they should entice them to at least think about the offer and then hopefully call.  However, a lot of the tactics used fall under the category of “deceptive or misleading” which is a clear violation of New Jersey and most federal regulations on advertising.

What really got me about this particular ad FHA Loan Acceptance Notice, was the fact that it had a list of all my debt (albeit misplaced and misrepresented) and my credit score!  It also clearly states on this form that they received the data from Equifax Credit Bureau.  I’m sorry, but I don’t remember Equifax Credit Bureau calling me up or sending me an authorization form to pull my credit.  I gave the authorization to Assured Mortgage Bankers Corp, not Equifax.  In my opinion, this is a clear violation of not only my privacy, but rights as a consumer. 

According to this form, I can consolidate all of my debt (including my student loan which is at about 2.5% and my car payment that is a 5 year loan) and save almost $3500 a month!  Who wouldn’t want to do this!!!! 

I felt violated.  I immediately brought this into the office and scanned it in and emailed it to an attorney I know who is a member of the Mortgage Bankers Association and teaches an ethics course for the pre-licensing requirements.  The attorney called early this morning and we both laughed about how blatantly misleading and deceptive this was, while being appalled that a credit bureau would sell my information to anyone.

I guess the message in all of this is to be careful of offers like this.  You know the old axiom, “what is too good to be true, usually is?”  Well this is case-in-point right here.  My house would need to appraise for $463,690.00 and if these idiots would have even attempted a zillow.com search they would have found that my home value is just a tad under that mark.  Additionally, why would I take a student loan at an insanely low-interest rate, a 15 year loan and a 5 year loan and repay it over 30 years giving the bank hundreds of thousands of dollars in interest?

The main culprit here isn’t the mortgage company that sent me this solicitation, it is the credit bureau.  You trust your mortgage company not to share sensitive material with people who aren’t associated with the transaction and most don’t.  However, what control do they have when the credit bureau shares your information?  How can they pull your credit without permission directly from you? 

Maybe someone in the finance industry needs to create an independent score model that can be sold to Fannie, Freddie and Ginnie Mae as an acceptable alternative to Equifax, Transunion and Experian so at least bankers and brokers know that their clients aren’t being sold over and over and over.

Check out www.optoutprescreen.com… just a note though about this website is that it is something sponsored by Equifax, TransUnion and Experian and may not stop THEM from sharing your information.

Government Loan Update and Clarification

I got a call from a good friend today about a message I sent to some of my friends who are currently in the military or have been in the military about Veteran’s Adminstration Loans (VA Loans).  I wrote that there was no mortgage insurance, however, she astutely pointed out that there was in fact mortgage insurance but it was a one-time upfront fee and in some cases (disabled veterans) the upfront fee is waived.  In hindsight, I should have written that there was no monthly mortgage insurance premium, like on FHA loans. 

On purchases the funding fee breaks down as follows:

Type of Veteran	Down Payment	Percentage for First Time Usage	Percentage for Subsquent Use
Regular Military	None	2.15%	3.30%
	³ 5% but < 10%	1.50%	1.50%
	10% or more	1.25%	1.25%
Reserves/National Guard	None	2.40%	3.30%
	³ 5% but < 10%	1.75%	1.75%
	10% or more	1.50%	1.50%
Disabled Veteran	N/A	Exempt	Exempt

The funding fee is a lot like the Upfront Mortgage Insurance Premium with a FHA loan.  The new upfront premium on a FHA is 2.25%, so if you are a first time buyer and a veteran it is a great option.  You will pay less of a funding fee, therefore finance less and not have a monthly mortgage insurance premium. 

For example a $200,000 VA loan versus a $200,000 FHA loan would look like this:

VA (first time use, no down payment)  200,000.00 x 102.15% = 204,300.00 total loan amount and zero monthly mortgage insurance

FHA (assume base loan amount is 200,000 after 3.5% down payment) 200,000 x 102.25% = 204,500.00 total loan amount. 

Although it is only $200.00 less of the total amount financed you will save about $93/mo in a monthly mortgage insurance premium that will not go away for a least 5 years.  At a minimum, you will pay about $5,600.00 over the 5 year period in mortgage insurance.

We’ve specialized in offering these government loans for the past 12 years.  VA Loans, FHA Loans and USDA Loans are all excellent government loans.  They provide borrowers with low down payment options and extend homeownership to a large section of the population.