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FHA financing is the financing of the last resort, or it's supposed to be that way

Saturday, January 5, 2013 - Article by: sbmcwilliam - Florida State Mortgage Group, Inc. - Message

FHA financing is the financing of the last resort, or it's supposed to be that way

By: Stephen B. McWilliam, President NMLS#375690 - Florida State Mortgage Group, Inc. NMLS#393326

Buyers, REALTORS(R) and even most loan originators almost immediately presume that a buyer with less than 20% downpayment must go with FHA financing; to the contrary FHA should be the last source of financing a buyer should consider. Plain and simply stated, FHA financing is typically the most expensive way to finance a purchase.

FHA financing only requires a minimum 3.5% downpayment. However, FHA financing requires both upfront and monthly mortgage insurance payments. Comparatively, conventional financing can be accomplished with as little as 5% downpayment and only one upfront mortgage insurance payment; no monthly mortgage insurance is required in this instance.

FHA's upfront mortgage insurance payment is currently 1.75% of the loan value and another 1.25% annualized but paid monthly. Effectively, the borrower is paying 3% of the loan value in the first year alone and 1.25% for years thereafter.

Conventional financing's required mortgage insurance upfront payment is 2.18% and does not require any future payments. If the borrower has an additional 5% for the downpayment the upfront mortgage insurance fee drops to 1.63%.

Even though FHA's interest rates average approximately .25% lower than conventional the monthly mortgage insurance payment quickly erodes the appearance of any savings. For example, a borrower would save an approximate $170.00 per month and realize an $11,000 savings over 5 years when considering a $200,000 FHA mortgage versus conventional.

  • Who then should seriously consider FHA financing as their only via financing option?
  • Borrowers with less than a 680 credit score
  • Borrowers with a debt to income ration in excess of 45%
  • Broward and Miami-Dade condo purchase transactions

In today's competitive market a buyer wants to look as good as they can to the selling homeowner and their REALTOR(R). Going the route of a 95% conventional financed loan may just provide that buyer with the necessary advantage over the typical FHA borrower.

A competent mortgage loan originator may be able to assist the borrower in rapidly increasing the borrower's credit score through a careful examination of the borrower's credit report. Most major lending institutions (a/k/a "bank") will typically not assist a homeowner in these regards.
45% DTI requires a 700 minimum credit score; 41% DTI is the maximum permitted 680-699.

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