So here we are the first week of January, and there may be a new sheriff in town.
FHA officially announced they will reduce the mortgage insurance costs for borrowers. The official mortgagee letter will be released soon with all the details. What does this mean for you, the homeowner/home buyer when it comes to your mortgage program of choice?
We believe this will cause more than a rippling effect even into the conventional mortgage world. That could be positive for conventional mortgage borrowers as well. What I am referencing are the Private Mortgage Insurance (PMI) companies. We all know PMI for conventional mortgages is credit score based. However, FHA is not. So when FHA changes their PMI, will the conventional PMI companies follow suit to remain competitive?
The other thing here, is that FHA raised it’s loan limits in Denver, so they are the same as conventional mortgages now.
Here are 5 reasons we believe FHA may be a better mortgage for many going forward.
1) More flexible credit standards– With all the regulations that went into effect last year one thing remains true. With a conventional mortgage you are capped at a 45% debt ratio. FHA is more flexible. Also, FHA is more flexible when it comes to past credit events (i.e. short sales, foreclosures, bankruptcies) and even disputed accounts on your credit report.
2) Exponentially larger down payment assistance/ grant pool- There always has been more down payment assistance offerings for FHA mortgages. Now as housing has become more expensive, there have been down payment grants for mortgages as well. FHA has always been built around affordable housing, so the grant programs for down payment are another plus when you factor incomes are not outpacing housing costs, and cost of living is higher so saving for down payments can be that much more challenging.
3) Lower interest rates– Yes, you heard me correctly. FHA mortgages have always had lower interest rates. Why would that be? You have look deeper. FHA mortgages are insured by HUD, rather than PMI companies. Even if someone put 20% down, and used a conventional mortgage their interest rate would be higher than an FHA mortgage. Where the savings comes from here is that person (20% down) wouldn’t need mortgage insurance.
4) Cheaper mortgage insurance– As you know conventional mortgages are based on credit scores. So what I mean there is the higher your score, the lower your interest rate and PMI costs. However, with the lowering of FHA mortgage insurance costs in many instances those putting 3-5% down on conventional mortgages will actually pay more mortgage insurance than an FHA borrower. Keep in mind, 10+% down is a different conversation.
5) Lower payments!- So put #3 and #4 together and what do you have? Well, take a $260K house on average. With a 680 credit score, mind you. If you were to think about picking between FHA and Conventional mortgage, do you know that with an FHA mortgage you would be looking at about $180 LESS per month in mortgage payment?
So tell me, do you think FHA is going away anytime soon?