It’s Not an FHA Problem
We’ve been getting a lot of questions about the FHA loan program lately, which we LOVE because it really is a wonderful program. People are looking for the best loan programs that will save them the most money and be the “smartest” choice long-term. We get it! In today’s economy, every little bit does count, so we wanted to take a moment to talk about the FHA loan, what to look out for, how it compares to a Conventional loan, and some red flags!
The Lender You Work With Matters
First, we’d be remiss if we didn’t start with a disclosure that the lender you work with when it comes to FHA loans does matter. Like we’ve said in the past, for other types of loans, such as the VA loan, all lenders are unfortunately not created equal on all the loan programs.
Why is it different working with RMN vs. an online lender or even other local lenders that say that they also do FHA loans?
A big difference is speed. A lot of those other lenders who say they do FHA loans might not be super familiar with the program (like we are) or do them very often. They are unlikely to have in-house processing, underwriting, and closings. We do FHA loans all the time, we work in-house, and we can get your loan closed in 30 days or less.
Differences in rates and fees are another thing to look out for. A lot of online lenders and even other local lenders have higher fees and rates, especially when it comes to closing a loan that they aren’t super familiar with.
On the flip side, you may encounter lenders that discourage the program altogether! This is a red flag. If a lender doesn’t want to give you all your options and talk you through the differences between loan programs, that is a sign that they may not be the lender for you. And if they try to tell you the rates are higher, it is likely because they don’t do the program often and don’t know how to do it, or they broker the loan—and that takes much longer.
Keep your guard up, and look out for lenders who say they can’t close in 30 days, that rates and fees are too high, that they just broker loans, or if they don’t underwrite in-house. Remember, it’s not the program itself that can be a problem . . . it’s the process!
When is an FHA Loan better than a Conventional?
The easiest difference to spot between the two loan programs is that FHA is 3.5% down, and Conventional can go as low as 3% down. But don’t stop looking there! It’s still possible that sometimes an FHA loan is the best option for someone of any credit score or income level because it simply comes out to a lower monthly mortgage payment in the end.
We had a client who was looking at both loan programs, so we compared a Conventional loan with 5% down to an FHA loan with 3.5%, a 695 credit score, a 45% debt ratio, and a $360K purchase price….the FHA loan was $120 less per month!
How? You will see the biggest difference in the interest rate and PMI between the two loan programs.
Using an FHA loan, a total monthly payment would be about $200 less per month compared to a Conventional loan with a 690 credit score—which makes the payment more affordable for the borrower AND makes it easier for them to qualify for a higher price point. In this specific case study, with the borrower’s 690 credit score, even with the difference in down payment percentages, the payment was still lower for FHA.
Conventional loans set an interest rate based on credit score (the best rate at a 760 or higher score, with an increase in the rate for every 20 points the score drops). Conventional loans also base PMI on credit score. FHA loans have one PMI rate and very little fluctuation with rate vs. credit score (and the start rate is typically .5% lower than Conventional).
Anything between 690-760 is not a “bad” credit score—in fact, those would be considered good scores! Not only that, but these scores are more common for people who are just starting to build their credit. These are the scenarios in which an FHA loan might be a better option overall. Who doesn’t want a lower overall monthly payment?!
Pairing FHA with the Iowa Finance Authority
There is something that makes this program even better, and that would be the option to avoid coming up with your own funds for down payment altogether. The Iowa Finance Authority (IFA) has a Down Payment Assistance Program that allows us to get borrowers up to 5% of the purchase price. Since the minimum down payment required for an FHA is 3.5% that means this program can cover the entire required down payment—and even leave something left over for closing costs!
There is no “gotcha moment” like surprise payments, interest, or other hoops to jump through. It is paid back when the home is sold or refinanced. With no payments or interest accruing, it is an excellent program, and the only “catch” would be that you have to work with an IFA-participating lender.
At RMN, we are IFA participating and preferred lenders! We use their programs all the time and can’t speak highly enough about them. If you’re looking for down payment assistance, contact us to chat!
Shouldn’t Sellers Avoid FHA Loans Though?
No! This is false! There is a misconception among sellers and listing agents that FHA offers aren’t desirable, they won’t work for an older home, it lengthens the process, etc.
As we said earlier, FHA loans should never be a longer process than any other loan unless you are working with a lender who only brokers the loan or doesn’t do them very often.
Just remember to work with a lender who knows the rules! Even with Conventional loans, a home inspection is usually done, and an appraisal is done, so there really isn’t anything major that would be flagged from an FHA inspection that probably wouldn’t be flagged anyway during a home inspection for any other type of loan.
There’s no reason why these types of offers should be avoided—we can still get closing done quickly and efficiently! If you’re unsure of the rules and requirements, just ask!
We’ve always done FHA loans, and we’ve always supported the program. Trust consistent lenders—be cautious if a lender is jumping on the bandwagon so that you don’t end up in a situation that spins out of control. Protect yourself or your buyer with experienced FHA lenders!