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• Saved by the Fha

When lenders and brokers close a loan, they all incur cost during the process. These costs are passed along to the borrower in the form of higher rates, or closing costs that are added directly to the closing statement (HUD). In the past, lenders have been known to be very liberal when applying their fees; these extra charges are called “junk fees.” Before you apply, you should insist that the lender disclose their fees on a form called good faith estimate (GFE, you can print a blank form from the link below.)

If you look at your GFE you will see a grouping of fees on the left hand side. Each fee is labeled 801, 802, and so on. These are the lenders fees. FHA has strict guidelines pertaining to the fees that lenders are allowed to charge when closing a loan. Unfortunately, they are very open-minded on the amount of discount points and origination points that they allow lenders to charge.

Lenders are allowed to charge one origination point and two discount points plus the “usual and customary” third party closing costs that FHA deems relevant. If you combine those fees with the additional money that the lenders can earn from “marking-up” the interest rate; lenders could make as much as $12,000 profit on a $200,000 loan.

In all fairness, most lenders don’t fleece their customers like this, however some do. If you are considering taking out an FHA mortgage I advise you to look at your good faith estimate carefully. If you see discount points listed in the “800” block of numbers do not close your loan. Some lenders will give very compelling arguments as to why they need to charge them, don’t believe it. By disallowing the lender to use discount points, you have effectively forced them to keep their closing costs in-check.

Another difference in charges that you will see over conventional mortgages pertains to the insurance each agency requires when taking out the loan. Conventional mortgages (Fannie Mae, Freddie Mac) will allow borrowers to forego the mortgage insurance if the loan is less than 80% of the appraised value. Not so with FHA, when you take out an FHA mortgage you will be forced to have mortgage insurance regardless of the loan to value. The exception is when you take out a 15 year mortgage, if your loan is less that 90% of the value of the home you can forego the monthly mortgage insurance.

Also, FHA charges an up front mortgage insurance premium (MIP). This is a one time, lump sum that is added on top of your loan. The MIP is calculated at 1.5% of the mortgage’s loan amount, i.e. a $100,000 mortgage would become a $101,500 loan amount. This premium is refundable on a prorated basis but, the formula that is used to calculate it is stored in the same warehouse that Indiana Jones keeps his worldly treasures.

When you begin to add up the differences between FHA closing costs and conventional mortgages, it would appear that FHA mortgages have the higher closing. However, it really depends on what your specific circumstances are as to whether or not an FHA mortgage is right for you. If you have good credit and a low loan to value, a conventional mortgage is definitely the best road to take. Even if your loan to value is a little high, you may still want to consider a conventional mortgage. A conventional mortgage charges PMI just like an FHA loan does, however it can be easily removed one the home falls below 80% loan to value, unlike FHA mortgage insurance.

On the other hand, if you have average credit and a higher loan to value FHA becomes the clear winner when choosing the most beneficial loan. The most important reason is that FHA is not a credit score driven product. FHA is a common-sense loan, meaning your credit score doesn’t have a bearing on your ability to get approved. FHA looks at the property, the income, the job stability and the overall responsibility the borrower has exercised in the last year. Of course there are more guidelines, but you get my point. Not to mention that FHA allows homebuyers to put as little as 3% down when buying a home.

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Terminating PMI When You Already Have One

The use of private mortgage insurance has been a great way to make it possible for a borrower to buy a home with as little as 3-5 % down payment and give the lender insurance in case the borrower defaults on the home loan. However since PMI payments can be significant, the borrower starts to ask himself/herself how to get rid of those payments.

The Homeowner’s Protection Act includes rules for automatic suspension of PMI payments and cancellation of PMI when 22% equity in the borrower’s home is reached. Those rules apply to mortgages signed on or after July 29, 1999, and exclude government-insured FHA or VA mortgages that are considered high-risk to default.

Additionally, disregarding the time when the mortgage was signed, the borrower may ask for PMI termination once s/he exceeds 20% equity.

Avoiding Private Mortgage Insurance via a Piggyback Loan

Piggyback loans are a very popular way of avoiding private mortgage insurance. It consists of taking a loan (first mortgage) covering 80% of the sale price of the home and taking and placing additional 5%, 10% or 15% on a second mortgage. A combination of 80% first mortgage, 5% second mortgage and 15% down payment is referred to as 80/5/15. Accordingly, the other two loan combinations are 80/10/10 and 80/15/5.

Although second mortgages generally have higher rates, in the end the borrower may save money because in contrast to PMI payments, now the loan payments are tax deductible.

Choosing a Finance Single Premium Option over Private Mortgage Insurance

Since an increasing number of borrowers are turning to piggyback loans in order to avoid PMI, the mortgage insurance industry came up with this solution claiming that it lowers monthly mortgage payments to the same or lower level as a piggyback loan. With this option homebuyers pay a single premium on their insurance and it is amortized over the term of loan.

One of the pitfalls of this solution is that few lenders offer this option, since Fannie Mae and Freddie Mac do not work with this kind of PMI structure.

Finding a Loan with No Private Mortgage Insurance

Loans with no PMI have one great disadvantage – they typically have higher interest rates. Instead of paying regular PMI, the latter is included in the higher rate of the mortgage.

Which of the above solutions will be best for you depends entirely on your particular case. Sometimes paying the private mortgage insurance might turn out more beneficial than choosing to avoid it with a second mortgage. Therefore you should consider your decision carefully and make all the necessary calculations in order to make the right choice.

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