FHA loans are incredible for first time buyers and buyers with credit challenges.
And you might be looking at the low down payment and the low interest
rates with FHA and thinking that this might be the best option for you,
but FHA loans have a huge drawback that most people don't consider.
So in this video, I'm going to share with you the three things you need to consider.
So you can know that you made the right decision when choosing to go with.
And FHA loan.
And the last thing that you want is to feel like your new home is a financial
prison due to excessive loan costs.
So I'll help you learn how to take advantage of an FHA loan rather
than it taking advantage of you.
Number one, the number one thing I want you to consider is FHAs
upfront mortgage insurance premium.
Okay.
So all FHA loans require a 1.7, 5% upfront mortgage insurance premium.
Costs.
And why do they do this?
This helps keep the FHA program going.
FHA loans are insured by the government which basically means that they
need a fund for that insurance.
So if somebody defaults on a loan basically FHA is going to come in and help
the lender, recoup their losses with it.
And that's how the insurance works.
They need to pull the insurance.
So they charge an upfront fee to people who take out FHA loans.
And this is how FHA can offer.
Flexible terms and lower rates than conventional loans can.
But for example, let's consider a $300,000 loan.
1.75% means that's $5,250 added to the loan amount.
So month one, your balance with the FHA is 300, $5,250.
And with conventional it's 300,000.
So that means that when you go to sell your home, your
balance is higher effectively.
You have to pay it back.
The upfront costs because it's finance into loan.
Now keep in mind.
This is because you finance that amount into the loan.
Not because you actually have to pay it back to an entity.
You're not paying anybody else.
FHA gets their cut upfront.
You finance it into the loan amount, but effectively you're paying it
back over a 30 year term or 50 year term, or however long your loan is.
And you're paying interest on that premium as well.
So if you're getting a 3% rate, you're paying 3% on the 1.7, 5%
you added to your loan balance.
So we can compare this to a commercial loan with zero upfront mortgage insurance.
At all.
And we can see the FHA has a pretty big drawback in just
without upfront cost alone.
I hope you learn to get a home that you want without getting
ripped off by a bad loan plan.
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Now, number two, what I want you to consider we covered the upfront
mortgage insurance premium also is FHAs monthly mortgage insurance.
Yeah.
FHA has two types of mortgage insurance upfront and monthly.
And for most people, FHAs annual mortgage insurance premium is 0.8, 5%
of the loan balance, and it stays on there for the entire life of the loan.
Now, this used to be different.
It used to fall off before a change in 2013 now all FHA
loans follow along these lines.
And so that means if you're alone is $300,000.
The monthly mortgage insurance will be $216 a month, and it
will be recalculated annually.
According to the average annual loan balance, basically every single
year it's going to recalculate what that annual premium is.
Now this premium does change based on your loan size and down payment.
According to this chart.
So interesting.
Interestingly enough, you can put 10% down on an FHA loan and your mortgage
insurance will drop off after 11 years now, compare that with a conventional
loan where mortgage insurance falls off anywhere between 20 to 22% equity.
This is an incredibly long time to paying mortgage insurance on an FHA
loan, especially considering most of the time FHA the mortgage insurance premium.
Monthly has a higher cost than conventional does, and
conventional mortgage insurance.
Isn't set by, isn't a set number, right?
FHA loans.
It's always 0.8, 5% based on our loan amount and our down
payment that can change and fluctuate with conventional loans.
It's going to be based on the credit score and the risk of the loan as well.
And this is going to be a mortgage insurance rate of anywhere
between a 0.5% to 1% on average.
And the big question.
Can you get rid of FHA mortgage insurance?
No, not unless you refinance to a conventional loan, there
is no way to have an FHA loan.
To pay it down and then get a, your mortgage insurance
removed without refinancing.
Even if you get an FHA loan paid down past 20% equity, you can not remove the
mortgage insurance premium from the loan.
You have to refinance to a conventional loan.
It's important to remember too, that we here MIP and PMI, private mortgage
insurance is the name given to mortgage insurance for conventional loans.
MIP mortgage insurance premium is the name given to mortgage insurance for FHA loan.
So those are the differences.
PMI MIP.
PMI conventional MIP is FHA.
Okay.
So how do you refinance, how do you get rid of the mortgage insurance?
And this is where you can take advantage of the FHA loan instead
of it taking advantage of you.
Number three is what I like to call the bridge strategy.
And we'll cover that in just a second, but why choose an FHA loan?
Normally an FHA loan, even though it might have a lower interest rate, tends
to have a much higher cost over the entire life of the loan compared to
conventional because of the upfront mortgage insurance and because of the
monthly mortgage insurance that often doesn't fall off for most borrowers.
And if we take a quick comparison, look at a $300,000 home FHA
is $59,000 more expensive over 30 years than a conventional.
Loan.
So when you get an FHA loan, usually it's for a very specific reason, we
need to use the FHA loan for a reason.
We're not just getting it because it's the cheaper option, because
usually it's a more expensive option.
So likely either some credit issues or that's income issues that are keeping
you from qualifying for usually less costly conventional loan either way
you're using an FHA loan, like a tool to help you secure the home that you
want so that you can then secure.
Cheaper financing in the future.
And I'd like to call this the bridge strategy.
This is the best way to take advantage of FHA loans.
It's to get the home that you want now, and then work on
what you need to refinance to a conventional loan in the future.
So you can save more money, not pay the extra cost over the entire 30
years that you would with FHA loan.
Now, there are some a couple of considerations to this,
obviously no one knows what rates will look like in the future.
But just the high cost of mortgage insurance alone can often
offset and increase an interest rate on a conventional loan.
A great example of this is I worked with a client with a five 87 credit score.
So she couldn't qualify conventional because he needed a minimum of
six 20 to qualify conventional.
But at that point she needed a home just for logistic reasons.
She had to get out of where she wanted to.
It wasn't just something that she wanted to do.
So she needed a home.
All right. So we helped her get an FHA loan.
And then connected her with a credit coach.
So in two years her credit score was above six 80 and she could refinance into a
much lower payment on a conventional loan.
So then she can then take that savings and use it to pay off the mortgage faster,
use it to pay off debt add it to savings.
Really.
Anything in there, but that's a much better strategy than to hold onto
the FHA loan for a long period of time, or to simply just back off from
buying at all, because you don't want to get an FHA loan to begin with.
We use it like a tool and the biggest trap I don't want you
to fall into is complacency.
I see too many people get into an FHA loan because it's what
works for them in the moment.
And they don't consider the long-term effects of the loan.
They just can't say we got qualified.
We don't want to have to do that again.
And so they never look at what they need to work on so they can
get a cheaper debt in the future.
All right.
And that's really, the name of the game is figuring out how do we refinance
into cheaper debt, along the way.
So they send an FHA loan for years without considering the opportunity
cost of what, if they did some work.
What if they could qualify for conventional in the future how much
could that save them in the long run for some people that might be
a small amount for some people that might be a really large amount.
If you are considering a strategy like this, you can talk to your loan officer
and say something along the lines of I think I can only qualify for FHA loan
right now, but would you be able to let me know what I need to work on?
So in the future I can refinance into a conventional loan.
FHA by no means is a bad loan.
However, you have to look at it like a tool, not a long-term option.
It's a tool that helps you accomplish something.
It's not a product that you want to hold onto for a long period of time.
You can take advantage of it to get what you want and have a plan
to save money in the long run.
So knowing more about FHA loans really can help you save thousands of dollars.
If you go with the correct loan strategy, moving forward to learn more
about qualifying for an FHA loan click on this video over here, you'll end
up knowing more about FHA loans than most of the buyers you may compete
with for the home that you want.