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Why are FHA Loans So Popular?

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Posted On: 05/27/2015

QUESTION:

I read that by getting a conventional mortgage I can save $12,000 when compared to Federal Housing Administration financing. If this is true, why are FHA loans so popular?

ANSWER:

A WalletHub study from December 2014 reported “many consumers with down payments below 20 percent can save $2,251 to $12,026 in just five years by choosing private mortgage insurance. The higher your credit score and the more money you are able to put down, the a potential savings from PMI.”

This study confirmed what many people had felt in recent years: The FHA – stuck with massive losses from loans originated between 2000 and 2008 – had to raise mortgage-insurance premiums to bulk-up its reserves. However, since the FHA now produces large annual profits, it has been argued that the time has come for premiums to be reduced.

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The study showed that the largest savings were available for those who put down 5 percent or 10 percent. The catch is that the FHA requires only a 3.5 percent-down percent, and many borrowers do not have the financial capacity for larger down payments, thus “savings” with more down are simply not available to them.

Also, the best rates for private mortgage insurance are available only to those with the highest credit scores. Since not every borrower has a high credit score not every borrower can get the best rates for private mortgage insurance.

About the time the study was released several things happened that changed the conversation.

1. A news release regarding the study went out Dec. 2, 2014.

2. On Dec. 8, Freddie Mac and Fannie Mae announced they would begin accepting loans with as little as 3 percent down instead of 5 percent down.

3. On Jan. 8, 2015, the Department of Housing and Urban Development announced that FHA annual mortgage-insurance premiums would be reduced by o.5 percent for most loans. According to HUD, “this action is projected to save more than 2 million FHA homeowners an average of $900 annually and spur 250,000 new homebuyers to purchase their first home over the next three years.”

The bottom line: The FHA rates that existed in early December generally have been lowered.

If you want to purchase with little down or refinance with little equity, have mortgage lenders show you the monthly costs for comparable loans and then you will be able to see which options work best for you.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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