FHA vs Conventional loan debate -- Is there truth in some things that you read????

Ever heard of that phrase, compare apples to apples?  I am a big advocate on this. So many times in the mortgage business and life in general do I hear and see people preach about a certain thing. Making you feel like they are 110% correct. Not knowing any better, unless you were well versed about this particular topic or did your research, that this information is actually false.

So, how do you relate to information that the public can read, but might be misleading, once the true facts are revealed. What if someone called one of your family members an idiot? You wouldn't take too kindly to this. For those that know me, I don't take too kindly to it or appreciate it either. And I consider my clients like family.  And because I am so passionate in helping people obtain their dream when it comes to financing their home, I like to make sure that we are all on the same playing field. And my prime reason for this is giving the consumer full transparency into lending and what's behind the scenes.

Here is the post in question. Agents Recommend FHA and VA Mortgages Much Too Often...Don't and Here's Why Before I dissect a part of this, I want to remind you that the author of this post, Rob Blake, is a true professional by heart. His expertise and knowledge in some areas has helped homeowners of the past. But I disagree on his tone in regards to Conventional vs FHA mortgages. He backs up the new conventional programs that have come out in the last several years and talks down to FHA financing. Most noticeably, he likes the my community home buying program. It's a conventional loan that allows you to finance 100% of the purchase price. But wait, I can do this with FHA also. Please read :  Creative FHA financing -- No money out of pocket from the buyer!!!  -- Part 1

Rob Blake makes this statement : Plus it's a good primer to remind you of the real uselessness of these programs now that we have other more competitive programs in the marketplace.

Here is my problem with Rob's statements. He tells us that the use of the DPA (down payment assistance) programs  with FHA loans are negative. You need to bump the sales price in order to make this work. Yes, this does happen. It's called abuse. And then Rob makes the statement : The 100% conventional loan programs also don’t leave the new home owner in an “upside down” position like the FHA program. The FHA client is only upside down if there is fraud involved. The fraud would be raising a sales price to an amount of a home that is not the true value of that home. But the same could be said for the conventional loan. How is this? Well, if the buyer needs seller assistance for their closing costs, the seller has been known to raise the purchase price also so these costs don't come out of their pocket per se. Ouch. Could this mean that the buyer will be "upside down" on the conventional loan also? YES.

So, let's put aside all fraud and anything else that you might assume. Let's compare the apples to apples of real numbers. If the FHA loan is done correctly with the assistance of the DPA program, compared to the my community loan program, which would be better.  Yes, FHA has a one time mortgage insurance premium of 1.5% that usually gets added to the loan amount. But, the my community program's rate is usually 1/2% higher than the FHA rate. On a $250,000 purchase, comparing both loans, the FHA payment will be about $80 less than the my community loan. This is taking into affect that we are using the Down Payment Assistance program to help the buyer make this just like the 100% conventional program. Making all monies the same.

Now, Rob Blake goes on to say that FHA will be abolished because Congress wants this to happen. His main reason is because FHA loans are down considerably in the last few years. Rob is 110% correct with this. But let's take a look why.

• more lenders utilized subprime loans because they were easier for the lender to get done. (people, FHA usually requires more work on the lenders part, not the borrowers part)  
• after the subprime demise, FNMA (freddie mae) & FHLMC (freddie mac)have developed better LTV loans, up to 100% financing.  
• your average loan officer only knows conventional and subprime
• it costs lenders money yearly to do FHA loans. You have to be FHA approved which is not cheap upfront. So, this means that not all lenders are FHA approved.
• you can get an answer at a press of a button for conventional loans. It's called DU or LP. Terms for automated underwriting systems. But wait, FHA has the same type of system. The problem with this is that if the results come back as referred in regards to the conventional deal on a my community deal, it's dead. An underwriter can't override this. Now, if it comes back with a referred on a FHA mortgage, an underwriter can override this as long as it meets FHA's guidelines. But this is a lot more work for the loan officer. But you don't get charged extra for this, as long as they are giving you a good deal upfront.

So, let's take a look at Rob and his experience. Rob is very knowledgeable when it comes to these types of conventional mortgages. He knows his programs and can give good advice on this. But what does it take to be a Colorado Broker? You don't need much of a set up to broker conventional loans. Minimal licensing and minimal money. If a lender can't do FHA loans, are you getting the chance to utilize any or all loans that could be at your disposal?  NO!!

In regards to FHA, it takes more knowledge and more money to be able to offer this type of financing to your clients. What sets me apart from so many other mortgage lenders is that I am a full service lender. I can do conventional, FHA, VA, and subprime.  And just for the fact that my company underwrites all of our FHA loans. It allows me to have full control. Comparing myself to so many that might just push you into one type of loan and talk negative about FHA, means that they usually can't do FHA loans.

 

Summary : I am going to repeat myself here. If a lender can't do FHA loans, are you getting the chance to utilize any or all loans that could be at your disposal?  NO!!  If this is the case then, are you missing out on a better rate? Just Maybe....