FHA Loans Part 2 – Financial Benefits
In FHA Loans Part 1 – I talked about how many Homebuyers choose FHA Loans because it is easier to qualify for an FHA Loan compared to Conventional Loan Programs. Many people, including mortgage professionals and realtors, think this is the ONLY reason home buyers use the FHA Loan Program. It is often thought of as the last option. This is not true. Sometimes it just makes financial sense to get an FHA Loan, here’s why.
With FHA Loans, the lender is protected by 2 forms of insurance:
- Upfront Mortgage Insurance Premium (UFMIP) and
- Monthly Private Mortgage Insurance (PMI)
What is UFMIP?
Upfront Mortgage Insurance Premium (UFMIP) is the upfront fee required by FHA. The fee is currently 1.75% of the sales price of the home. On a $200,000 loan, that equals $3,500.00. This amount is typically wrapped into the loan amount, but can be paid in-full at closing.
What is Monthly Private Mortgage Insurance?
Next, Private Mortgage Insurance (PMI). PMI is typically paid monthly. ALL loans with a loan-to-value greater than 80% will have PMI in one form or another. It could be Lender Paid (built into interest rate), Single Paid (up-front payment), paid monthly (part of mortgage payment), or Split (upfront and monthly). But no matter what – it gets paid.
Subscribe to get more Answers to Common FHA Questions Emailed to Your
On a standard 30 year mortgage with 3.5% down-payment, FHA will require Monthly PMI of .85% or $140.58/monthly on a $200,000 loan for the life of the loan. This amount and length can vary based on term (30 year or 15 year) and down-payment. But, it is important to note, this is a FIXED amount.
How does this help a homebuyer?
When doing a Conventional Loan, the monthly PMI is not a fixed number like FHA. The PMI is significantly impacted by both Credit Score and Down Payment. Meaning – if your credit score is below a 700 and you are only putting 3-5% down, there is a good chance your monthly PMI will be higher than FHA. The lower your score, the higher your PMI will be with a Conventional Loan.
Because of the added protections from UFMPI and PMI, interest rates with and FHA Loan are fairly consistent. Whether you have a 720 credit score or 620 – the interest rate stays very competitive. This is NOT the case with Conventional Loans. The interest rate is impacted like the PMI is. The lower the down-payment and credit score the higher the interest rate. Typically, once the credit score is below a 680, it significantly impacts the interest rate for a mortgage.
For borrower with a credit score below 680 and with a smaller down payment – the lower PMI and Interest rate can GREATLY reduce the monthly payment.
If you fit into that category – it is important to see both options side by side. Depending on your plan and situation – an FHA loan could very well make sense for you!!!