Take a Walk on the Wild Side
Once in a while, someone will ask me to name my favorite loan type. VA? Conventional? FHA? USDA? My answer: it’s none of those; my favorite type is one that is CLOSED. That was cheesy, for sure. I felt my eyes rolling as I typed it. Sorry about that.
Regardless of the eye rolling and the groaning, it’s the truth. If the loan is closed – no matter which one got us to that point – that means the client was able to reach their goal, long or short term, and they can move on to the next project/passion in their life.
Quite often, though, what I do get from a number of people is the attitude that an FHA loan is a second-class citizen in the land of loans, and that couldn’t be further from the truth. Sure, if you’re buying or selling a sizable property overlooking the valley, someone qualifying for an FHA loan isn’t going to be in your pool of prospects. That’s not snobbery; that’s math.
Sometimes I get sneers from the borrower when I mention an FHA loan; sometimes it’s a look of “give me a break” from an agent when I tell them their client is going to use an FHA loan to purchase their home. For buyers and agents alike, that really needs to stop – not because I’m a thin-skinned crybaby who’s starting to take it personally but because you’re missing out on more than one of the great benefits that the FHA loan has to offer. Rather than don my buckler and shield and stand a mighty defense for this oft-maligned and misunderstood princeling of a loan product, let me show you some simple math.
Same borrower is qualified to purchase a $250,000 home with either an FHA or a conventional loan:
FHA Conventional
Interest Rate 4.125% 4.875%
Down Payment (%) 3.5% 3%
Down Payment ($) $8750 $7500
Monthly Payment (P&I w/Mortgage Insurance) $1359.22 $1659.21
Money Spent in 1st Year $25,060.64 $27,410.52
Money Saved in 1st Year $2349.88 ----
Money Saved Each Year After $3599.88 ----
Money Saved in Seven Years $23,949.16 ----
Most first-time homebuyers stay in their homes for seven years (or fewer), and then they move on to the next house. Whether the buyer went FHA or conventional, in the first seven years of ownership, the mortgage insurance would still be in place on either loan. The FHA loan, though, would allow them to have $300 more per month to spend on something else or save, and it’s always nice to have options, right!
If your mind isn’t quite completely blown, let me throw in this little stick of dynamite to finish off the job. On the same $250,000 purchase, the only way to get the monthly payment on a conventional loan to be almost identical to the FHA payment is to put down 10%, or $25,000. Let me remind you: on the FHA loan, the minimum down payment of 3.5% is only $8750. So, in order to get your monthly payment (principal, interest, and mortgage insurance) to be roughly the same, you would have to spend $16,250 MORE UP FRONT – all for the sake of having a conventional mortgage.
This may seem like overkill, but I’m going to do it anyway: remember, FHA loans allow a higher debt-to-income ratio than a conventional loan. This means that if the borrower can qualify for a payment of $1659.21 (under conventional guidelines and a LOWER allowed DTI), that same borrower could use an FHA loan to purchase approximately $50,000 more house, or $300,000. What agent wouldn’t want that type of “cushion” for search and negotiation purposes? And what buyer wouldn’t want more options?
The next time you hear the letters FHA being bandied about, think of them as standing for Flexible Homebuying Alternatives, because being conventional isn’t always the best thing to do in life.