What’s an FHA Loan, Anyway?

Welcome to those of you that are new, and it’s a great pleasure for the Chris Jones Group to be able to provide this Rate Watch to you every day. No, really. We mean it.

Since the news is all over the map this morning – trade gap is widening, WalMart missed its earning target but raised its earnings guidance going forward, jobless claims dipped unexpectedly, the Bank of England (Fidelity Fiduciary BANK!) cut its rate to 5%, American Airlines isn’t apparently an airline any more – and traders have no idea what to do, I thought I’d give everyone a paragraph on FHA loans.

The Federal Housing Authority (FHA) has a class of loans that it guarantees. The FHA doesn’t make loans itself; instead, it guarantees them to the banks that do make them. Since the loans are guaranteed, the rate is usually lower than what you’d get in the open market (not always true), and that’s a good thing. Additionally, FHA loans do not have rate penalties for cash-out refinance, and that’s a VERY good thing for consolidators. FHA loans will go up to 97% loan-to-value (LTV) without penalties to the rate, and that is now the best deal in the market, and has no prepay penalties, and will accept loans from people with iffy credit. Sounds great, right? Well, there are a couple of drawbacks. One is that FHA loans carry monthly mortgage insurance, and you’re going to pay it for 5 years unless you refinance out of it, no matter what your LTV is. After 5 years you can get rid of it if your balance is below 78% of the value of the house established when you did the loan. Another is that there are no provisions for any sort of stated income – it’s full doc or nothing, and the debt ratios are very strict, which means self-employed people usually have a hard time getting these loans (because we have such great accountants). That’s bad, but what’s worse – much worse – is the Up Front Mortgage Insurance Premium (UFMIP – you think I could make up acronyms like this? Of course that’s for real), which tacks on 1.5% of your loan amount to your closing costs. Remember that low interest rate? UFMIP adds about .5% to it because of the additional amount you have to borrow. So, bottom line, it’s a good tool for some, but not the magic bullet for mortgage woes.

Probably more than you wanted to know. The market’s flat. We did get a dip yesterday as the market priced in the news that Washington Mutual will no longer be wholesaling loans through mortgage brokers, but we’re a lender AND a broker, so we don’t care. We’ll just use our own money. The 30-year fixed is pricing in at 5.75% at the moment for good credit borrowers. Don’t expect a great deal of movement today. Kind of refreshing, actually. It’s been like the floor of the Chicago Board of Trade here the last few weeks.


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