If you’ve been around the housing market or ever obtained a home loan in the past, you probably heard about the FHA home loan program.
This is a government backed (or insured) loan that was originally set up to help borrowers in under-served areas – those with lower down payments or lower credit scores — be able to enjoy the benefits of home ownership.
First-time buyers loved this! In fact 78% of FHA loans on the books right now are first-time buyers.
Why are first-time buyers using this? Mostly because they don’t have enough cash … or so they think … to qualify for traditional conventional financing.
Well, there have been a lot of changes in the last several years.
Right now, FHA is actually struggling to survive. They’ve paid out so much in claims due to all the short sales and foreclosures, that Congress is talking about having to bail them out just to keep them viable.
And on the flip side, conventional financing – because of the clean-up in the mortgage industry in the last several years – has actually loosened its lending guidelines, and made it easier to get a conventional loan than it would have been in the past.
Let’s run a quick comparison:
First of all, with FHA financing, only a 3.5% percent down payment is required. With conventional, it’s 5%. So really not much of a difference there.
FHA has always been known to allow gift funds for the down payment and closing costs. Gift funds mean you have a family member or someone with a closely established relationship provide the money for you for your down payment and closing cost for your loan.
Conventional loans have not always allowed this. But recently that has been totally loosened up, and now your entire down payment for that 5% down for conventional can also be gift funds.
FHA requires (at least in-house for us) a 640 minimum credit score. Same for conventional!
So as you can see, both of these programs are actually quite similar in terms of qualifications.
Now where’s the real difference? That comes in the mortgage insurance.
Because of FHA’s struggles, they have incrementally raised the cost of monthly mortgage insurance, and the upfront portion they are adding to a loan balance; just about every 6 months in the past several years.
So now, it’s considerably more expensive than its conventional counterpart for a lot of borrowers.
Conventional loans allow you to get rid of your MI once you’ve built up at least 20-22% equity in the home through paying down the balance, or your home going up in value.
But FHA now requires you to keep your MI for the life of the loan.
So, in other words; Never. Goes. Away.
When you look at the cost you are pay in for an FHA loan verses the cost of a conventional loan over a 5-10 year period of time, conventional is going to win out … probably 98% of the time!
So the next time you want to get approved to buy a house; if you only have a small amount of cash, or maybe a family member willing to help you out, you should explore conventional financing as an alternative to FHA, as it could be much better for your bottom line.
Give us a call and we can run the numbers! 503.698.5801 or www.GoNorthwestLoans.com.