Industry expert Dave Hershman talks about why FHA loans are still attractive in spite of rising insurance rates
By Dave Hershman
Special to MPA
Why would anyone offer FHA loans with the mortgage insurance rates so high? I don't understand why loan officers are even offering the program. --Theresa from Arkansas
I agree that FHA has increased their rates to a point that the program is less attractive. However there are two reasons the program is still an attractive alternative. FHA lending standards can be less restrictive than conventional alternatives. It is interesting that the guidelines may not read much differently, but in reality some lenders will offer a lower credit score on FHA vs. conventional.
Why? For one thing, FHA loans are 100% insured, which is part of the reason that the insurance costs more as compared to conventional insurance which covers the lender typically down to 75%. Basically, there is less of a risk that a lender will take a loss on an FHA loan if they follow the rules and the loan goes into foreclosure. And this is not the only guideline that makes FHA more liberal. For example, FHA requires only 3.5% down.
Secondly, you will see FHA loans offered at a lower rate than conforming. This difference will make up some, but not all, of the difference in the cost of the insurance. In the past few years, while FHA has been raising their insurance costs, Fannie and Freddie have been raising their guaranty fees. One raises the cost of the loan and the other the cost of insurance. Bottom line, if someone can afford to put 5% down and can qualify for conforming, most times they will be better off with conventional. But FHA will still remain an important finance alternative.
--Dave Hershman
Do you have a reaction to this commentary or another question you would like answered? Email Dave at [email protected].
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
Special to MPA
Why would anyone offer FHA loans with the mortgage insurance rates so high? I don't understand why loan officers are even offering the program. --Theresa from Arkansas
I agree that FHA has increased their rates to a point that the program is less attractive. However there are two reasons the program is still an attractive alternative. FHA lending standards can be less restrictive than conventional alternatives. It is interesting that the guidelines may not read much differently, but in reality some lenders will offer a lower credit score on FHA vs. conventional.
Why? For one thing, FHA loans are 100% insured, which is part of the reason that the insurance costs more as compared to conventional insurance which covers the lender typically down to 75%. Basically, there is less of a risk that a lender will take a loss on an FHA loan if they follow the rules and the loan goes into foreclosure. And this is not the only guideline that makes FHA more liberal. For example, FHA requires only 3.5% down.
Secondly, you will see FHA loans offered at a lower rate than conforming. This difference will make up some, but not all, of the difference in the cost of the insurance. In the past few years, while FHA has been raising their insurance costs, Fannie and Freddie have been raising their guaranty fees. One raises the cost of the loan and the other the cost of insurance. Bottom line, if someone can afford to put 5% down and can qualify for conforming, most times they will be better off with conventional. But FHA will still remain an important finance alternative.
--Dave Hershman
Do you have a reaction to this commentary or another question you would like answered? Email Dave at [email protected].
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
