The Mortgage Brothers Show
FHA Loans and What you Need to Know
In this post, we’re going over FHA loans and answering some of the most common questions we get asked about them.
When are FHA loans a good fit for you?
FHA loans are a more suitable product for a borrower with lower credit scores and a lower income than when compared to a conventional loan. FHA pricing is much better when you’re in the high 600s, credit score wise, but mid or low 600 still work quite well. So, if your score is in the 600s, FHA loans are probably the right product for you.
Why am I being steered to an FHA loan?
FHA loans were created for a borrower who is slightly credit challenged and potentially doesn’t have as much money available for the down payment as they would like. FHA loans have a slightly higher debt-to-income ratio than conventional loans, and for some people who can’t get conventional loans, they can sometimes qualify for FHA loans. If you have a large down payment, say you have 30% down and you have a low credit score, you can sometimes still get a conventional loan. So, if you come to us and you have a 650 credit score and a massive down payment that changes a lot.
The biggest thing is going to be credit score
FHA best serves those with lower credit scores. This is because it gives you phenomenal pricing, and the reason it gives you phenomenal pricing is because the FHA is actually insuring these. When you go along with FHA, the HUD has ensured the banks so that if you go into default and you have to go into foreclosure they will make the bank whole. All FHA borrowers are basically paying the premiums for this insurance through mortgage insurance.
The two types of mortgage insurance
There are two types of mortgage insurance: upfront and monthly. Part of what is really unique about FHA loans is that you have upfront mortgage insurance. So, you’re paying a fee upfront where they actually roll it into your loan and then there’s monthly mortgage insurance. While this might sound expensive, it’s really not. Upfront mortgage insurance allows your interest rate to sometimes be a half a percent lower than what it otherwise would be. Don’t think of the insurance as bad, think of the insurance as a good thing, because if it wasn’t there, it would be a lot more expensive. If you get an FHA loan, you’re almost always going to have a lower interest rate than a conventional loan. People then usually ask why we don’t just always go with FHA, but even though the insurance gives you a lower interest rate you still have to pay for, and account for the costs of, the mortgage insurance.
What are some disadvantages of FHA loans?
One is that the monthly FHA mortgage insurance doesn’t go away. You can’t shake it off, like you can on a conventional loan. If you put less than 20% down, you have private mortgage insurance, but you can get rid of it. To clarify, if you put less than 10% down it’s on for life. If you put more than 10% down, you do have to have it on there for 11 years. But when you compare that required monthly mortgage insurance to what it’s giving you, it pales in comparison.
When the FHA loan is superior
If an FHA is a multiunit, you can get in as a primary occupant and lease out the other. In doing this you’ll have a phenomenal interest rate and you can have that ridiculously low down payment of three and a half percent. In this case, conventional loans can’t touch it. So we would say, the FHA product for the multiunit is superior, hands down. The good thing about an FHA loan is that it’s going to get you into a home and it is going to get you started on a journey of building wealth. But, at some point, when your credit score increases, and when you’re dealing with a little less risk, you’re likely going to want to get into a conforming loan. You can always refinance into a conventional loan further down the line. So, don’t be afraid of FHA. If you’re interested in getting an FHA, or any other type of loan, get in touch today.
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Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.