FHA Mortgages

by Mortgage Nerd on August 22, 2013 · 0 comments

How are the FHA loans a shift from the ordinary mortgages?

FHA loans are just like any of the other ordinary loans, but still are different than the ordinary home loans. This is mainly because of the requirements, the eligibility criteria and its advantages and even the disadvantages. It is much easier to obtain an FHA home loan, in comparison to the traditional mortgages. In fact, the process through which an FHA loan is secured, is much different than the process which is followed in case of the regular home loans. In case of FHA refinancing or loan modification too, you will be required to consider some additional factors.

FHA versus conventional home loans

The FHA loans are offered by the lenders who have insurance with the Federal Housing Administration, against the losses which may incur through borrower defaults. On the other hand, the lenders who offer ordinary home loans, are in no way insured by any government or private institutions. In case of the borrower defaults, it is the lender who will have to try and get back the money from the homeowner. Some of the other differences, in between an FHA loan and the regular mortgages are:

FHA loans have low down payment requirements, in comparison to the ordinary loans. Unlike the ordinary home loans, where you are required to make a down payment of 20%, the FHA lenders require you to make a minimum down payment of 3.5%. However, in order to enjoy this advantage, you would be required to have a minimum credit score of 580. On the other hand, in case of the ordinary home loan, the greater your credit score, the better will be the offers. So, even if you have poor credit, it may be possible for you to buy a home or refinance it through an FHA loan.

The interest rates on the FHA home loans are really low, if compared to its counterpart (the ordinary home loans). So, managing an FHA loan is much easier than an ordinary loan. It is mainly the interest rate, due to which it becomes hard for the homeowner to go on making the regular payments.

The loan limit in case of these two loan types, differ too. In case of the FHA loans, the loan limit is quite high. It is set at $729,750. On the other hand, the lenders offering ordinary loans are required to conform to the loan limit, mentioned by Fannie Mae and Freddie Mac. The loan limit in case of the ordinary loans is $625,500. If the lender and you agree to a loan limit more than this, it will be considered as a jumbo mortgage. Therefore, you can obtain an FHA loan, if you are in a high cost region, or if you need a bit more than the ordinary loans for buying a home.

The FHA loans do not have a large number of options under them. On the other hand, in case of the traditional home loans, you can have numerous offers to choose from. If you opt for an ordinary loan, you can obtain a 1 year loan, a 5 year one, a 10 year one and more, as per your needs and requirements.

So, this is how the FHA loans differ from the conventional loans. Obtaining an FHA loan can both be advantageous and disadvantageous. However, the advantages of FHA are more. Furthermore, considering the present scenario where most of the people are low on affordability and are crippled with bad credit, FHA loans make greater sense.


When you “lock” your interest rate with a lender you are essentially entering into an agreement with your lender in which the lender agrees to assume the risk of the interest rate changing during the time of the lock period, and you are agreeing to close your loan with the lender even if the interest rate goes down. However, every lender has different terms regarding their interest rate lock agreements and it is it imperative that you know the questions to ask because it could be the difference in hundreds to thousands of dollars in savings. In this blog post I will outline the questions that you need to ask your lender about their interest rate lock terms.

What are your different lock periods and what is the difference in price for each lock period?… This question is important because every lender has different lock periods that come with a cost. For example, one lender might offer lock periods of 7, 18, or 30 days.  Others might offer 15, 30, and 45 days.  Some lenders may even offer up to a 180 or 300 day lock.  The general rule of thumb is the longer the lock period the more you will pay in discount points. For example, you may pay an extra .25% ($250 on a loan of $100,000) in closing costs for a 30 day lock versus a 15 day lock.  If your settlement deadline is only 14 days away, there is no sense in doing a 30 day lock.

Do you guarantee your process times and do you have lock extension fees?… Because there are certain loan processing requirements out of a lenders control, very few lenders will guarantee a processing time and these same lenders won’t pay for your lock extension fees if your lock expires. If you are working with these lenders you will want to make sure that you lock for a long enough period to get the loan done so that you don’t have to pay any extension fees. Some lenders have extension fees of .25% ($250 on 100,000) for every 7 days. The other option is to find a lender that will either guarantee the processing time or absorb the cost of the lock extension.

What happens if my lock expires and I don’t do an extension?… Many lenders have a policy called worst case pricing.  This means that if you lock your interest rate and rates come down, you aren’t able to let your lock expire and get the better rate.  At one lender I use to work for, to get the lower rate a borrower would have to withdraw their loan application and wait 30 days before reapplying.  There is another lender that I know of that doesn’t even offer a lock extension. 

Do you have a renegotiation policy?… Some lenders have a one time “float-down” option which allows you to take advantage of a lower interest rate even if you have already locked in.  Others might have a renegotiation policy where, for a cost,  you can renegotiate your locked rate lower if interest rates have fallen. Others may have no renegotiation policy at all and when you lock your rate that is what you will get. 

Is my lock valid if I change loan programs or the size of my loan?… For many lenders, if your loan program changes or if your loan amount changes by more than 20%, this will invalidate your lock and you will be subject to the market rate, which could be bad news if interest rates have gone up.  If you are deciding between a couple of different loan programs (i.e. 15 year, 30 year, 7/1 ARM) this would be a very important question to ask.

What is the longest lock period that you offer?… This would be a very important question for somebody that is building a home or has a lease-option transaction, or any transaction that might take longer than normal.  The longest lock period at some lenders might only be 60 days while others might offer 360 days.  Many lenders will have an up-front fee, besides the extra discount points,  for any lock longer than 90 days. 

When will you lock the interest rate?… A smart loan officer will answer this question with, “When you tell me to lock it”.  Some people may not like this answer but ultimately the choice to lock in an interest rate rests on the borrower’s shoulders.  A good loan officer should explain how interest rates move and the potential advantages and disadvantages of locking versus floating (not locking), but wait to lock in an interest rate until the borrower says so.  It is important to discuss this with your loan officer so that there are no misunderstandings when it comes to locking in the rate.

I believe that Lock Policy is one of the characteristics that can be very different amongst lenders. When you are shopping around for a mortgage make sure that you are asking these questions along with your questions about interest rates and closing costs.  One lender might have a great interest rate on a 18 day lock but if it takes them 90 days to process the loan than it could end up costing you much more than you bargained for.


Single Premium Mortgage Insurance

by Mortgage Nerd on September 11, 2012 · 0 comments

Mortgage insurance is something that you buy for the lender so that they will give you a mortgage in the form of a conventional loan with less than a 20% down payment. I like to think of it as a necessary evil. Most people that have done a little research on getting a mortgage know about the mortgage insurance requirement. However, I have found that very few people know about a type of mortgage insurance called Single Premium Mortgage Insurance. We will discuss it in this blog post as I believe it can be a great way to save a lot of money over the long term.

What is Single Premium Mortgage Insurance?

First lets talk about the most common type of mortgage insurance. Most people think of mortgage insurance as a monthly fee that they pay as part of their full monthly mortgage payment.  This monthly fee is paid until a 20% equity position is reached in the home and the mortgage insurance is removed by the lender (Suppose to be removed). With only a 5% down payment, this can take about 7 years making minimum payments.

Depending on your credit score, debt to income ratio, and loan to value, this monthly mortgage insurance fee could be anywhere from .6 to .9% annually. This is a fee of $50 to $75 per month for a loan amount of $100,000. If you only put 5% down it will be closer to .9%, and if you only make minimum payments, you will have to pay this mortgage insurance for about 7 years or more before you have the required equity position to get rid of it.

Single Premium Mortgage Insurance is a one time fee that you pay at closing to essentially buy out of the monthly fee. By paying this one time fee you are done with mortgage insurance for the life of the loan.

How much does it cost?

The cost is determined again by your credit score, debt to income, and loan to value.  With 5% down, it could be anywhere from 1.5% to 2.5% of the loan amount. On a loan amount of $200,000 that would be a costs of $3,000 to $5,000.

The way I see it is this…On a loan amount of $200,000 the monthly mortgage insurance might be anywhere from $100 to $150 per month. Again you would pay this for at least 7 years if you make minimum payments and only put 5% down. With a best case scenario you would pay approximately $8,400 over 7 years.  Or you could pay $3,000 up front and be done with it.  If an financial planner told me that I could invest $3,000 today and have $8,400 in 7 years guaranteed, I would call him a liar.

When does paying single premium mortgage insurance NOT make sense?

Obviously this wouldn’t make sense in a situation where you aren’t going to have the loan for enough time to make the buy-out worth it. It is usually about 30 months that you need to have the loan. If you are buying a home as a short term investment than single premium mortgage insurance is not for you. Also, if interest rates are falling and there is a chance that you might refinance in the next couple of years than single premium mortgage insurance might not make sense.

However, if you are going to have the loan for at least 3 or more years and you have the funds to pay for it (The seller can pay for it also if you negotiate that in the purchase contract) than the single premium mortgage insurance is sort of a no-brainer in my opinion.



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The ARM, or Adjustable Rate Mortgage can be a great strategy for the right situation. For example it can make sense in a situation where the homeowner isn’t going to live in the home for longer than the fixed rate period.  I will discuss a few situations when the ARM can make sense, but first […]

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Can I Refinance With Negative Equity?

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What is the 4506-T Form?

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Is interest on a 30 year mortgage front-end loaded?

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Buying a home can be such an exciting new venture. However, it is not uncommon for new homeowners to become quickly disenchanted with home ownership when they realize how slowly they are paying off their 30 year mortgage. It happened to me when I bought my first house.

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Why was my loan application denied?!

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“But my loan officer said that I was approved!” is heard all too often in the mortgage world these days. In this article we will explore a couple reasons why a borrower can be approved immediately after the initial loan application but eventually denied once the lender’s underwriter gets a hold of the file. Most […]

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