Before I go too far, let me say that I am not a mortgage professional and that I always recommend buyers talk to a mortgage professional to decide which loan product is best for them. I write this post because I believe there are many nay-sayers telling buyers there are no loans for them. They also tell buyers that the only loans available require 20% down and credit scores off the charts. That is simply not true.
Prior to 2008, FHA loans were very rare in San Jose and the general Bay Area because the maximum loan limit the government would secure was $417,000. This was the beginning of the exotic loan product season. For those that did not have 20% or were purchasing a home that cost more than $417,000, interest only, no down payment loan products were created. It was the affordability answer for many.
The FHA loan limit for Santa Clara County is now $625,500. This opens the flood gates for FHA loans to be made and many mortgage officers are dusting off the requirements and learning how to complete FHA loans in a hurry. The FHA loan is a different animal and FHA underwriters and approved appraisers have a little more red tape to go through before blessing a buyer on a purchase. However, with this said, FHA loans provide those who have reasonable credit, good salaries, but not much money to put down, a way to buy a home in the Bay Area.
Some will argue that FHA loans end up costing the buyer more. Any loan will cost you more when you do not have 20% down and exceed the maximum insured amount of $625,500. Simple fact. But let us look at the difference between what is required to close for and FHA loan verses a conventional type loan.
The obvious difference comes in the form of down payment. Even with the required impounds, FHA insurance premium, and reserves, the buyer who finances with FHA comes to the table with less.
Obviously, if you place more money down, you will open the door to lower interest rates. With a conventional loan and 20% down, you will not pay mortgage insurance.
The difference in monthly payment for this example would be approximately $500.
The FHA charges a premium to fund their loans and that very much depends on your credit score. If you want to save money on loan costs, bump up your credit scores and reduce your debt-to-income ratio (DTI). This is called the FHA premium. It can be financed into the loan or paid at time of closing. Also, consider that FHA allows the seller to credit the buyer up to 6% of closing costs. This can be an incredible bonus in the current buyer’s market. Where previously sellers almost rarely helped buyers now many sellers realize if they are going to sell their home in this market they need to help make it a win-win. Remember the $42,094 in the above example? Ask a seller to pay 3% of closing cost and you now have lowered that number to $27,094. Ask for another 3% and buy down some points so you can lower your monthly payments and you will be very close to reaching the monthly payment of a conventional loan.
If you want to learn more about the mortgage industry and the ins and outs of working with mortgage officers, I highly recommend the book, Mortgage Confidential: What You Need to Know That Your Lender Won’t Tell You, by David Read.
There is no doubt that this is a tight lending market. However, everyone involved in the U.S. economy knows the only way to work our way out of the housing crisis and begin reasonable appreciation means extending credit. The government has provided a way for potential San Jose buyers via the increased loan limts for FHA backed laons. With current interest rates hovering around 5% for most borrowers, there is opportunity to take advantage of lower prices and lower rates. It may not be the right answer for everyone but it is a good place to start if you are in the market to buy a home.