In the recent past, conventional mortgages held numerous advantages over FHA-backed loans. FHA loans were typically more expensive with their upfront 1.5% mortgage insurance premium (MIP) and the monthly mortgage insurance premium included in the mortgage payment.
Times have changed.
With rising foreclosures, mortgage companies are sustaining record losses and are tightening their lending qualification criteria, plus altering or eliminating numerous conventional loan products. The first to go was the 100% loan-to-value or zero-down conventional mortgage. In January of this past year, Fannie Mae (a company that buys and sells mortgages on the secondary market as investments, and has a huge influence over the types of loans available to the consumer) announced risk-based pricing adjustments (mortgage-speak for “costing you more money”) for high loan-to-value ratios, low credit scores, and features such as taking “cash-out” of the property on a refinance.
For example, prior to the change a conventional borrower with a 640 credit score borrowing at 95% loan-to-value could get the exact same interest rate as a 740 credit score borrower putting 20% down. During those times you were either in the club or you were out. You were either an “A Paper” or “Conforming” borrower or you were a “Sub-Prime” borrower. The main difference now is that there are many different levels of qualification for conventional borrowing. Today, a 740 credit score will get a better rate than a 640 credit score, and 20% down will get a better deal than 10% down. The greater the risk, the greater the rate when it comes to conventional loans.
FHA Government Loans have become the better alternative in many cases for those who are not eligible for the absolute best rates on conventional mortgages. This group mainly consists of those with credit scores under 720, those exceeding 80% of their homes value, or especially those taking “cash-out” greater than 80% of their home’s value. There is small rate adjustment for credit scores between 580-600 with FHA, and a bigger one for those under 580, but 600 plus borrowers are on the same playing field as everyone else. Because FHA interest rates are in line with the best conventional rates, it will usually result in a better deal for those subject to Fannie Mae pricing adjustments. Additionally, FHA has become almost a no-brainer for those who are still stuck with a sub-prime mortgage. They allow for manual underwriting which looks at the person more than the credit score.
Now more than ever, borrowers need a competent mortgage professional who is up to date on the current market conditions. Gone are the days where you can call around asking what interest rates are and hope to get a fair deal. All the numbers for your specific situation have to be plugged in to see what adjustments you may be subject to, and what type of mortgage is best. I offer a 100% free mortgage analysis to all Louisville area residents. To learn more visit www.billsexpert.com.
Mike Roberts is a senior loan officer at The Mortgage Warehouse. You can reach him at 502-244-4700, ext. 117 with any of your questions.