The Fall of the FHA Empire?

Before “Too Big to Fail” became a cringe-inducing colloquialism, we had “armor that cracked” and the “mighty that fell”. Do we now have a front row seat for The Fall of the Roman (FHA) Empire?

FHA Loans were once the best game in town. If you had less than 20% to put down, FHA was your man. But now… 5% down with a conventional loan may ultimately be the cheaper/faster/better alternative than going the FHA Way.

If you’re deciding your mortgage loan based on sheer costs (and most of us are!):

FHA Loan

  • $100,000 property
  • 3.5% down

– Need 1% of the loan amount upfront

– Need 1.15% of the loan balance for the monthly Mortgage Insurance – this is included in the monthly payment

Conventional Loan

  • $100,000 property
  • 5% down

– Need .94% of the loan balance for monthly Mortgage Insurance – this is included in the monthly mortgage payment (FHA used to be .55%)

So as to the proverbial bottom line for FHA, if you’re already putting 3.5% down plus the 1% of the loan amount upfront, you’re already at 4.5% in loan costs; and if you go conventional, you don’t need to contend with the laundry list of mandates associated with FHA loans.

However, the circumstance in which FHA still shines is if the borrower does not have the best looking credit. To qualify for conventional mortgage insurance, the borrower will still have to fit inside a rather small underwriting box. Therefore, a less than stellar credit profile could disqualify the borrower from the conventional mortgage insurance program; while FHA still provides opportunities for those with busted up credit.

At the end of the day, I’m thinking an FHA Loan is just not the workhorse it once was. From my Florida mortgage lender seat, your best bet always involves the exploration of alternatives.

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