With there being higher mortgage insurance rates on FHA loans, why would anyone be offering FHA loans? For certain borrowers, a FHA loan might be the right option. For some people who don’t understand the mortgage industry, they would wonder why any loan originator would even make FHA loans available right now.
Why a FHA Loan Might Be Considered
It is true that there are fewer benefits to the program right now because of the higher rates, but there are still two main reasons why a FHA loan might be beneficial. The lending standards for FHA loans are regulated by fewer restrictions when compared with standard conventional alternatives. The guidelines are similar, but the truth is that some lenders offer lower credit scores on FHA loans compared with conventional loans.
You can talk to a NMLS licensed loan originator to learn more, and determine if these loans are right for you. The reason for these differences can be seen when you understand the details. FHA loans are completely, one hundred percent insured. Because of this insurance, they cost more than the conventional insurance (standard insurance typically provides coverage for the lender up to 75%). If the lender follows the rules, there is a small risk for a lender to lose money on a FHA loan if foreclosure happens on the loan.
Another reason why FHA loans are more liberal is because they only require 3.5% down payment. Many people like the idea of the small down payment, because they don’t have the ability to provide for a larger down payment.
FHA loans can help to make up the difference of the insurance cost, because the lower rate will cover the gap. If you look at the trends over the past few years, you will see that the insurance costs of FHA loans have been increased, and at the same time the guaranty fees of Fannie and Freddie have also been increased. In one situation, the cost of the interest rate is raised, and in the other situation the cost of the mortgage insurance is raised.
So What’s the Bottom Line?
FHA loans are a good alternative to consider for specific situations. But, in most cases where a person can qualify for conforming and they have the money to put down 5%, then they will be better off with a conventional loan. Loan officers will likely consider both options, with the understanding that each situation is unique. It is important to consider the individual needs of the borrower, in order to choose the best loan type for their personal circumstances.
With the changing housing market, loans are also changing as well. Before you make a decision about the type of loan, please make sure that you understand the options that are available as well as the ways the different loans will work. There are pros and cons to the different types of loans, and it is best to do your homework before making a decision.
We provide most Conventional & Government mortgage programs with minimal down payment requirements, along with the ability for borrowers to use down payment assistance programs. Our goal is to help you work with your prospective clients by offering the most up to date programs & guidelines. To learn more, please look through my website DaveKevelighan.com or call me anytime at (303) 520-0004.