There are big advantages to “going FHA” these days — especially if you’re making a low downpayment on your next home. FHA mortgage rates are less expensive as compared to conventional ones.
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What Is An FHA Mortgage?
First, it’s important that we get technical, just for a moment. There’s no such thing as an “FHA mortgage”. The proper term is FHA-insured mortgage. This is because the FHA doesn’t make home loans to homeowners, specifically — banks do. The FHA insures the loans that the banks make.
If a mortgage loan meets the FHA’s official loan guidelines, the FHA will insure the mortgage. End of story.
The FHA’s most common loan program is the FHA 3o-year fixed rate mortgage. The FHA’s 30-year fixed rate mortgage works like any other 30-year fixed rate mortgage. It has a starting loan size, a regular payment schedule, and, in 30 years, the loan is paid in full.
Where the FHA mortgage stands apart from it conventional mortgage peers with respect to it minimum downpayments.
The FHA’s standard downpayment requirement is 3.5%, no matter in what state you live, and no matter how much you borrow. From California to Virginia and every state in between, the FHA allows 3.5 percent down. It’s the lowest downpayment program of any generally-available mortgage product.
For a low-downpayment mortgage, the FHA is your friend.
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FHA Mortgage Rates Separate From Conventional Ones
FHA mortgage rates aren’t the same as “Freddie Mac” rates; the ones you see quoted each week in the papers and on TV. Those other rates are tied to Fannie Mae- and Freddie Mac-issued bonds. The bonds are instruments of Wall Street.
FHA loans, by contrast, are backed by a group called Ginnie Mae. This is a big deal because — of all the mortgage bond issuers in the country — Ginnie Mae is the only one that is backed by the full faith and credit of the United States government.
Because FHA mortgage bonds are backed by the government, they are considered “risk-less” to investors in Ginnie Mae bonds so FHA mortgage rates reflect this guarantee. As the global economy sputters, investors search for safe places to store their cash and Ginnie Mae — via its FHA-insured mortgage bonds — gives it to them.
In an uncertain economy, FHA mortgage rates can be lower than conventional ones.
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Is FHA Better Than Conventional?
Today’s FHA mortgage rates are very, very low. As such, there are multiple scenarios in which an FHA mortgage would make more sense to a home buyer than a conventional one — especially for people whose credit scores are low.
This is because conventional loans via Fannie Mae and Freddie Mac punish mortgage applicants with FICOs under 740. The FHA does not.
Furthermore, mortgage insurance rates via Fannie Mae and Freddie Mac vary by credit score as well so a mortgage applicant with FICOs under 740 gets hit twice — once on the rate, and once on the mortgage insurance.
As a good rule of thumb, here’s how to choose FHA over conventional :
- 3.5 percent down : Use FHA financing only
- 5 percent down : Lean toward FHA financing
- 10 percent down : With excellent FICOs, lean toward conventional financing
- 15 percent down : Lean toward conventional financing
- 20 percent down : Use conventional financing
There are exceptions, however, and these exceptions should figure into your math :
- If your credit score is 720 or lower, look to FHA first at all times.
- If you’re buying a 2-unit, 3-unit or 4-unit home, look to FHA first at all times.
Keep in mind, though, that FHA mortgage insurance is a 60-month deal with all 30-year mortgages and with conventional mortgage insurance it is not. Conventional mortgage insurance goes away once your home’s equity reaches 20%.
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FHA : “Mortgage Insurance Rates May Rise” For New Loans
With FHA mortgage rates 75 basis points lower than a comparable conventional loan, we should expect bigger monthly savings than what we get. However, the FHA imposes a stiff mortgage insurance premium on its borrowers — up to 1.25 percent of the amount borrowed annually in most areas, and up to 1.50 percent in “high-cost” areas such as Alexandria, Virginia and Brooklyn, New York.
The premiums are much higher than for a comparable conventional loan. This is because the FHA had a rash of loan defaults between 2008-2011 and its reserve funds are well below its minimum mandate. By law, the FHA has to keep $2 “in the bank” for every $100 in insures.
At last count, the FHA held just $0.24.
In order to raise its capital reserves, the FHA has raised its mortgage insurance rates four times in four years. Plus, it’s expected that that premiums will rise again later this year or in early-2013. on all new FHA mortgages in late-2012 or early-2013. It will happen — we just don’t know how soon.
The good news is that existing FHA-insured borrowers will still pay their current rate so, if you’re looking to the FHA for a mortgage, the sooner the better, really.
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See Today’s FHA Mortgage Rates
If you’re buying a home and want a low downpayment mortgage, look to the FHA first. With mortgage rates low and FHA mortgage insurance still (relatively) cheap, the FHA mortgage program will give you the best bang for your buck.
Make sure to compare to conventional financing, though — just to be sure. Rates change all the time and you need to make sure you’re getting the best deal possible. Ask your loan officer to run the numbers both ways.
