Going to the FHA for the Unconventional Mortgage

Like all bubbles that have burst, the housing crisis left an extremely scarred landscape. What used to be a fairly routine mortgage process for a qualified home buyer has turned into a not so routine inquisition, one that in some cases almost defies logic. But one longtime lender of record may be just the answer for frustrated purchasers who are either denied a conventional mortgage, or are so deluged with onerous financial data requests that the process turns into a nightmare.

That lender is your Uncle Sam’s own Federal Housing Administration, or FHA, which provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes, including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring more than 34 million properties since its inception in 1934.

Most “qualified” buyers think of the FHA as the provider of the loan for their first starter home, and often do not even consider it an option due to some of the government requirements. But on closer inspection, the FHA loan may be the best kept financing secret around. Here’s why:

1) To avoid mortgage insurance on a conventional loan, the buyer has to put down 20%. An FHA loan can be obtained with as little as 3.5% down. The mortgage insurance (MI) “premium,” or down payment, can be financed into the loan; it runs about $4,000 on a $250,000 loan. On a 15-year loan, that amounts to about $22 per month. In addition, the monthly MI payment on a 15-year FHA loan is only about $60. In most cases, the insurance cost to the homeowner will drop off after five years or when the remaining balance on the loan is 78% of the value of the property, whichever is longer.

2) The rates are equal to and in many cases lower than conventional financing. Based on the closing rates from Wells Fargo & Co. (NYSE: WFC) at 5 p.m. EST Monday, a 15-year fixed loan was 2.625%. Conventional rates are commensurate, again quoted yesterday at 3% with a $1,300 lender credit. But again, lenders require at least 20% down. Plus, approval, even with 20% down, is not guaranteed.

3) The monthly payment is a complete escrow of ALL costs and is required. This is principal, interest, taxes, mortgage insurance and hazard insurance. Years ago, when money markets paid 3% and higher interest, it made sense to pay your property taxes at the end of the year. With those rates now at 0.03% or lower, why not end up the year paid in full on property tax? This really makes sense in states like Texas, where property tax is higher due to no state income tax.

4) Lastly, if your mortgage originates with a home builder like Ryland Group Inc. (NYSE: RYL) or Lennar Corp. (NYSE: LEN), it ultimately will be sold quickly to a money center bank like Wells Fargo. There, you can request a recurring 14-day payment of your loan amount. On a typical 15-year loan, this shortens the payment time by as much as 19 months.

So there you have it, one way around the financing jungle provided by the government that, in part, created that financing jungle in the first place.

Lee W. Jackson