Tag: fha loans

Why Conventional Loans are Better than FHA Loans

conventional loans vs fha loans

Conventional Loans are home loans that conform to the underwriting guidelines set by the Government Sponsored Entities, Fannie Mae and Freddie Mac.  In the past, conventional loans were only for elite borrowers that had 20% or more for their down payment. Times have since changed opening up great new programs for low to middle income earners and first time homebuyers.

Why are Conventional Loans Better than FHA Loans

Conventional Loans are now an affordable option for those without the highest credit scores. Mortgage Interest Rates are currently in a tighter spread. By this I mean that the best creditor borrowers and the lower score borrowers will have an interest within 1% to 1.5% of each other.

This is helped by programs like Fannie Mae’s HomeReady Loan and Freddie Mac’s HomePossible Loan. These programs limit the loan level price adjustments (LLPAs) which increases the par offering rate. These programs also allow first time homebuyers to buy a home with only 3% down while FHA requires a minimum down payment of 3.5%.

In the past, Private Mortgage Insurance (PMI) rates would also be absurdly high for lower score borrowers seeking Conventional mortgages. With the competition between PMI companies, mortgage insurance rates have dropped significantly in the past few years. This allows Conventional loans to be very competitive with Government Insurance Loans like FHA mortgages.

Related: See our Conventional Mortgage Calculator

FHA Mortgage Insurance Cost May Cost More than Conventional Loans

Conventional loans may be a better option for homebuyers than FHA Mortgages because of the mortgage insurance savings. On Conventional loans, there is typically a monthly PMI fee if a borrower does not put a 20% down payment towards their purchase. FHA has a similar fee plus an up front charge.

Related: See our FHA Mortgage Calculator

FHA Mortgage insurance VS Private Mortgages Insurance

FHA Mortgage InsurancePrivate Mortgage Insurance
Required on all Loans Required on conventional mortgages with less than 20% down
Two Types of mortgage insurance May be dropped once loan to value is under 78%
Cannot be removed if down payment is less than 10%
What is an FHA Up Front Mortgage Insurance Premium?
May be more expensive Many options for PMI payments
Offers Reduce Premiums for First Time Homebuyer Programs

FHA Loans charge two types of Mortgage Insurance Premiums (MIP). There is Upfront Mortgage Insurance Premiums (UFMIP) which are payable to HUD at close. The UFMIP is calculated as a percentage of the original loan amount. This fee is currently set at 1.75% of the base loan amount. For example, If you borrower $200,000, the FHA UFMIP added to your loan amount is $3,500. This is an extra expense not found on Conventional Loans.

What is an FHA Annual Mortgage Insurance Premium?

The Second type of Mortgage Insurance on FHA Loans is Annual Mortgage Insurance Premiums (MIP). This calculation varies based on loan-to-value and loan term but is as high s .85% of the original loan amount. For example, if you borrowed $200,000 the annual MIP would be $200,000 * .0085 = $1,700 which is split up over 12 months and added to your monthly mortgage payment. In this example, your payment would increase by $141.67 for MIP.

April 2013, FHA made a major change which started the shift away from this loan type. They changed the way annual FHA mortgage insurance fees were charged by making FHA Mortgage Insurance Premiums payable for the life of the loan. In past years, it would drop off under certain circumstances similar to Conventional Loans when your loan was paid under 78% of the home’s value.

Conventional Loans are more Attractive to a Seller than FHA Financing

In many areas of the country, there is a shortage of homes for sale which creates a sellers market. This means that sellers can be more picky when accepting offers from buyers on their homes.

When a buyer is making an offer with FHA financing, a seller may be reluctant to accept due to additional requirements for the home’s conditions compared to Conventional Financing. Having a Conventional Loan Pre-Approval may make the difference from getting your offer accepted or getting rejected by a seller.

Why Would Anyone Still Do FHA Loans over Conventional Loans?

There are certain circumstances where FHA finance may be a better option than a Conventional Loan.

FHA Loans with Down Payment Assistance

Many Mortgage Down Payment Assistance Programs (DPA) work only in conjunction with FHA financing. If a borrower does not significant funds available or down payment, DPA programs may help the buy a home.

FHA Loans Allow for Lower Credit Scores

Conventional Loans have minimum credit score requirement of 620. If a borrower has a credit score lower than this, FHA financing may be the only option. Currently FHA allows for credit as low as a 530 with a 10% down payment or as low as 580 with only a 3.5% down payment. Many borrowers with a credit score lower credit scores may have no problems qualifying for FHA financing when Conventional loans are not an option.

FHA Loans Have Shorter Wait Periods Than Conventional Loans

FHA loans have shorter wait periods for major life events such as bankruptcy or foreclosure.

  • FHA loans only require a 2 year wait period from Chapter 7 Bankruptcy while Conventional requires 4 years.
  • FHA requires a 3 year wait period for foreclosures while Conventional Loans require 7 Years.
  • These wait periods may allow a borrower to buy a home with FHA financing while conventional is not an option.

FHA Loans allow for Higher Debt To Income Ratios than Conventional Loans

A borrower may be better off with an FHA loan over conventional financing if they have a high Debt To Income Ratio.

  • Conventional Loans typically require a borrower to have a Debt-to-Income (DTI) of 45% or less to qualify with a maximum DTI of 50%.
  • FHA is more flexible with higher debts allowing a maximum of 56.9%. Borrowers with higher debts may only qualify for FHA Loans.

FHA Streamline Refinance

If a borrower already has an FHA Loan but does not have a significant amount of equity in their home, they may qualify for a rate reduction through an FHA Streamline Refinance. This loan type may allow them to drop their rate and payments without an appraisal or documenting income and with little to no costs. This is a program unique to FHA financing and can help a borrower that purchased their home when their credit scores were lower but have since improved.

Summary of Why Conventional Loans are Better Than FHA Loans

With the current guidelines set by FHA, Fannie Mae and Freddie Mac, Conventional Loans may be a better fit for buyers than FHA loans. Conventional loans offer lower down payments of only 3% for first time homebuyers while FHA loans require 3.5% down. Mortgage insurance may be significantly cheaper on Conventional loans versus FHA loans. Lastly, submitting an offer with Conventional Financing may be more attractive to sellers over an FHA Pre-Approval.

To get more information on what loan type maybe the best fit for your situation, call a licensed loan officer today at 800-555-2098 or request information below.

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Use Your Tax Refund As a Down Payment to Buy a Home

Saving money for a down payment can be one of the biggest challenges in buying a home. Most loan programs require some form of a down payment from the home buyer. During tax season, this may be the perfect opportunity to qualify for a new home. IRS tax refunds are eligible as a source for a down payment for home buyers. With several low down payment options available, even a small tax refund may be the key to becoming a home owner.

Do I have to wait for my tax return to get pre-approved?

No, you do not need to wait to get your refund back to go through the pre-approval process. When you call in or request loan information on Riverbank’s website, you can let your loan officer know how much money you are expecting to get back.  Your loan officer can use that as a starting point to begin your mortgage pre-approval.  You should file your taxes as soon as possible that way you can receive your refund as right away. The quickest way to receive your refund is via direct deposit. January 29th is the first day of 2018 that the IRS will accept tax returns for 2017.

Low Down Payment Home Loans

You may be able to use your tax refund as a down payment to buy a home. With our low down payment home loans, even a small refund can be enough to help you become a home owner. Low down payment home loans include the following options:

Tips to increasing your IRS Tax Refund for a Down Payment

When it comes to mortgage qualifications, assets are a crucial part in the overall financial picture. To make sure you have the best chances at being approved you should document more than enough asset in the bank, retirement or of course from your tax refund. Here are a few tips to increase your IRS tax refund.

Claim Dependents on your tax returns.

During the year you have have your employer lower or remove your dependents so they withhold more of your income for taxes. When you file you will then claim any dependents including children, spouses or those that you financially support. This will help to boost your refund at tax time.

Contribute to your retirement account to get extra tax benefits.

If your company sponsors a tax deferred retirement account such as a 401k or 403b, you may be able to participate and lower your taxable income. If you are self employed or work for a business that does not have a formal retirement plan then you may be able to contribute to a qualifying Individual Retirement Account (IRA) to reduce your income and save for retirement.

Itemize your expenses on your tax return.

If you have enough in deductions, you may be able to itemize your deductions to lower your taxable income. Many times, people claim only the standard deduction. If you have enough qualifying expenses or charitable contributions then itemizing may help boost your refund.

Things You Should Not Do With Your Tax Refund

There are some things that you shouldn’t do with your tax refund when you are considering buying a home. Doing some of these things may cause your loan to be rejected due to certain guidelines that lenders follow.

Do not move money around without documentation

You should not elect to receive your refund in the form of cash or withdraw the money from your bank account immediately. A lender does not want to finance someone they feel could be money laundering. Even if you are not money laundering, but it looks as if you are your file can be denied if you cannot document your paper trail.

Do not waste your Tax Refund on things you do not need.

Another thing that you should not do is to waste the money that you have received. Getting a large chunk of change at the beginning of the year can lead to temptations. Be sure to use this money as a way to reach your financial goals.

Your tax refund can allow you to put a down payment on your new home and will decrease the monthly payment on your home. You can also look into receiving seller’s concessions then you can have some if not all of your closing costs paid for.

Why you should use your tax refund to buy a home.

For future homeowners tax refunds can be a great source of money to use as a down payment on a home. Although the refund can be tempting to spend on things that could be considered more fun like shopping or going on a vacation it is a better idea to use it towards an investment like a home.

There are advantages to owning a home vs renting. Monthly mortgage payments can cost less than renting an apartment and unlike an apartment you can sell the home and make money off of it when you are ready to upgrade. In many areas, renting can cost significantly more than owning your own home.

To review options on how you can use your tax refund to buy a home, Call Riverbank Finance today at 800-555-2098 if you are ready to take the first step in buying a home.

Request Information Now!

FHA Lowers Mortgage Insurance Premiums for 2015

FHA Lowers Mortgage Insurance Premiums for FHA Loans in 2015

The Federal Housing Administration has announced that they will be reducing the mortgage insurance premiums (sometimes called PMI or MIP) charged on all FHA loans. The rate reduction will be nearly half the current costs cutting the insurance premiums down from 1.35% to .85% annually. This is great news for new home buyers and those that currently have FHA mortgage loans.

The History of the Federal Housing Administration (FHA)

The FHA program has been in place since 1934 when it was created to help spur home ownership in the United States. At the time, banks required very large down payments and strict mortgage terms which allowed very few to qualify to become homeowners. Since then it has insured mortgage loans for over 34 million home owners and remains a major loan program to consider.

What are the benefits of FHA Loans versus Conventional Loans?

FHA loan options typically have lower down payment requirements and more flexible guidelines than conventional financing. Many clients choose FHA financing for home purchases for benefits that can include as low as a 3.5% down payment, higher debt-to-income (DTI) ratios, home renovation options, lower mortgage rates and lower minimum credit standards as compared to conventional loans.

What do Lower Mortgage Insurance Premiums mean for New Home Buyers?

With the lower mortgage insurance premiums, home buyers will be able to save on their monthly payments. This monthly savings may allow them to qualify more easily or even qualify for a more expensive house for the same mortgage payment (FHA loan example).

With today’s low inventory of homes for sale, this may allow home buyers to expand their searches to find the home they have been waiting to purchase. Additionally, the lower mortgage insurance premiums may allow them to consider renovating a property or including upgrades into their financing through programs such as the FHA 203k renovation loan. The FHA 203k Streamline Renovation Mortgage may allow a home buyer to finance up to $35,000 in repairs for things such as new appliances, carpeting, flooring, paint, electrical fixtures and other upgrades to make a home their dream home.

What does Lower FHA Mortgage Insurance Mean for People that Have Recently Gotten a FHA Loan?

Those that have recently purchased a home with FHA financing or refinanced to a FHA loan, may be eligible to take advantage of the reduced insurance costs by refinancing their mortgage. Now is a great time to refinance due to the lowest rates in nearly 2 years as well as the lowered insurances costs.

If you have paid at least 6 mortgage payments on your FHA loan you may qualify for a FHA Streamline Refinance. This FHA refinance program allows a homeowner to refinance their FHA loan to a new FHA loan with a lower rate. The FHA Streamline Refinance Mortgage typically has no costs, no application fees, no appraisal and no income documentation.

How Do I Qualify for a FHA Streamline Refinance Mortgage?

Qualifying for a FHA streamline refinance is as easy as paying your mortgage payments on time. Once you have paid a minimum of 6 mortgage payments on your FHA loan and you can save at least 5% off your mortgage payments you may be eligible for a FHA Streamline refinance loan.

How much will the Lower Mortgage Insurance Costs Really Save on a FHA loan?

To show the savings on the FHA mortgage insurance it may be best to take a look at an example FHA loan scenario. Let us make the following assumptions:

Loan Purpose: Home Purchase
Loan Type: FHA 30 Year Fixed
Purchase Price: $250,000
Down Payment: 3.5% ($8,750)
Interest Rate: 3.50%
Base Loan Amount: $241,250
Annual Property Taxes: $2,400
Annual Home Insurance: $900

Before 1/26/2015After 1/26/2015
Principal & Interest$1,102.28$1,102.28
Property Taxes$200.00$200.00
Home Insurance$75.00$75.00
Mortgage Insurance$271.41$170.89
Total Mortgage Payment$1,648.69$1,548.17

In the above illustration of reduced FHA PMI, the home buyer would save $100.52 per month on their mortgage payments. Over the life of their loan that would give them a total savings up to $36,187.20 (if they kept their loan for the full term). This is a savings of over 6% which would be the equivalent of $15,000 more purchasing power for the same payment or a home purchase price of $265,000 vs $250,000.

When do the lower FHA Mortgage Insurance Premiums start?

FHA case numbers starting Monday January 26th, 2015

The FHA will begin issuing new FHA case numbers starting Monday January 26th, 2015. From that date forward any new FHA loans started will be allowed to take advantage of the lower mortgage insurance costs.

2015 FHA Mortgage Insurance Premiums Chart

FHA MIP Chart for 2015

What if I am currently in the process of getting a FHA loan? Can I still get the lower rates?

Yes. You may be able to get the reduced MIP if you have not yet closed and funded your loan. Speak with your loan officer about requesting a cancellation of your current FHA case number and ask them to request a new FHA case number on or after January 26th, 2015.

What is the Minimum Credit Score for FHA Loan Financing?

Each bank and lender sets their minimum required credit score for FHA financing. While most banks and lenders set the minimum credit score at 640 and up, some lender allow for credit scores much lower. For example as of 1/26/2015 Riverbank Finance LLC will allow credit scores as low as 560 with a 10% down payment and 580 with only a 3.5% down payment for FHA loans in Michigan.

How Do I Apply for a FHA Mortgage Loan?

The Federal Housing Administration does not directly lend money. They insurance banks and lenders against losses which allow them to lend with eased guidelines. Applying for a FHA loan can be done by speaking with a licensed loan officer at 800-555-2098 or click here to apply for a FHA Loan.

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Where can I Find More Information the Reduced FHA MIP?

The announcement was made on January 9th, 2015 from the FHA Mortgage Letter 2015-01.  For more information on FHA loans visit www.hud.gov or speak with a HUD approved counseling agency in your area.

Disclaimer: Riverbank Finance LLC is neither a government organization nor part of FHA or HUD. Rates, terms, fees, and programs given above are examples for illustration purposes only. This is not a commitment to lend. Not all will qualify.

FHA Back to Work After Government Shutdown

FHA back to work after the government shutdown now faces backlog of FHA loans.

FHA Logo from HUD.GOV – Riverbank Finance LLC is not a government agency.

While the Federal Housing Administration (FHA) was not fully closed during the government shutdown, they were running on limited staff for the 16 days of uncertainty. Most FHA Lenders and Banks continued to process and fund FHA loans during this time which has created a backlog of FHA endorsements and questions from these companies.

In response to undoubtedly hundreds of questions, the FHA has released a letter to all banks and lenders to inform them of the status of one of the Nation’s largest mortgage programs:

To Our FHA Stakeholders:

FHA has worked diligently during the 16-day government shutdown to support the housing market, consumers, and stakeholders.  We are very pleased to be fully operational and wanted you to know that we will be working hard to bring business back to normal.

During the shutdown, FHA continued to facilitate loan endorsements and certain REO and servicing/loss mitigation activities with some limitations.  The majority of FHA-insured mortgage loan products continued to be originated and could progress through the pipeline.  And many REO and servicing loss mitigation activities were able to continue with minimal interruptions. 

However, since we had a very limited number of staff working during the shutdown, we have a considerable backlog of work.  Some of the backlog includes processing HECM endorsements, other cases that must be manually endorsed, condominium project approvals, incoming questions from lenders or borrowers, etc.   We are prioritizing the backlog and will be working to address more critical items within 30 days and then to clear our backlog within 60 days.   Please allow us time to respond to inquiries already submitted through the FHA Resource Center and the National Servicing Center as duplicate requests will only slow the process.

We appreciate your efforts to work in partnership with us during this demanding time.  Together, we can quickly and effectively get back to the business of supporting the housing market.   We appreciate your patience.

Sincerely,

Charles Coulter 

While the shutdown may have created some backlog and delays, the FHA will continue to operate as usual with little to no delays in loan closings. For questions or concerns on your loan scenario, contact Riverbank Finance at 1-800-555-2098 or submit your inquiry below.

Question on FHA Loans

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