Yale Roth M.A., M.Ed

Archive for the ‘Fha’ Category

Sometimes homeowners and first time home buyers will ask me what is a discount mortgage broker.

A discount mortgage broker is someone who provides a mortgage service at a discounted price.

That means that the mortgage rate that is quoted is either lower than what can be found in the market place or, more commonly, it can be secured at a lower price or cost to the homeowner or first time home buyer.

What the discount mortgage broker is doing is providing a mortgage rate at a discounted price.  This means that the commission or revenue to the discount mortgage broker is less.

So instead of working on a 1% commission, the discount mortgage broker may be working on .75% commission. The 1% or the .75% commission the discount mortgage broker works on is calculated by multiplying that 1% – for example – by the mortgage amount.

For instance, if the mortgage amount is $200,000, the discount mortgage broker is making $2000 in revenue.  That means the discount mortgage broker is working off of a 1% margin.

A discount mortgage broker will drop their margin to close more mortgage loans.  In effect, the discount mortgage broker is working on volume, as opposed to the 1 or 2 big mortgage deals which would produce big revenue.

Be careful of a mortgage broker who may call themselves a discount mortgage broker.  Shop the mortgage correctly.

Not only do you want a mortgage rate quote, but you want to know how much the discount mortgage broker is going to charge you to get it.

Compare that with two other “discount mortgage brokers” and see who is being the most competitive and who you feel you can trust.

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With mortgage rates very low, a lot people who are already in FHA loans are wanting to do a FHA streamline refinance.

What is a FHA streamline refinance?

Well, there are 2 kinds of FHA streamline refinance: one with an appraisal and one without an home appraisal.  Obviously, most people want to avoid the appraisal as it’ll save them the appraisal fee – which ranges between $350 and $450.

In order to qualify for the FHA streamline refinance WITHOUT the appraisal, your new loan amount must be lower than then the original FHA mortgage loan amount.

So, let’s say that the original FHA loan amount that you’re currently in was $200,000.

In order to qualify for an FHA streamline refinance without the home appraisal, the new loan amount can’t exceed $200,000.

Simple enough.

With the FHA streamline without the appraisal, you are not able to finance your closing costs.  So if your closing costs are $2000, you have to pay that out of pocket.

FHA will, however, allow you to finance the upfront mortgage insurance premium (UPMIP) that FHA charges, which is 1% of the loan amount.

Also, note that FHA will not allow you to streamline into a shorter term loan.  So you can’t streamline from a 30 year fixed mortgage into a 15 year fixed mortgage.

Also, your monthly mortgage PAYMENT has to drop by 5%.

When underwriting the FHA streamline mortgage, a copy of your existing FHA note and HUD-1 settlement statement from the time you took out the original FHA mortgage is required.  This will allow underwriting to verify the original FHA loan amount.

Debt to income ratios are not calculated when underwriting the FHA streamline refinance, which is why it’s called “streamline.”

A FHA streamline refinance WITH an appraisal is required when you’re borrowing more than the original FHA mortgage amount.

The FHA streamline refinance is a good loan type to get into if your currently in an FHA mortgage and have recently took it out.  Also note that the FHA mortgage rates are the same as the FHA mortgage rates for a non-streamline FHA loan.

If you’ve been your existing FHA mortgage for 5 years – let’s say – you are eligible to stop paying the monthly mortgage insurance premium (MIP).   This is a big deal.

Here’s why.

If you apply for a FHA streamline refinance, you will have to pay the monthly MIP again and it has to stay on the loan for 5 years and you’ll need 22% equity in the property to remove it – so this may not make sense even if you’re lowering your mortgage rate.

So the FHA streamline refinance will allow you to lower your mortgage rate and mortgage payment without having to go through the rigors of a normal underwriting process.

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I get a lot of people asking me ”should I take out an FHA mortgage.”  The short answer is “it depends.”

FHA mortgages provide many benefits over conventional mortgages; however, the FHA mortgage is designed for a certain borrower profile.

An FHA mortgage would be the right mortgage if you’re buying a new home and you only want to put down 3.5% as a down payment.  This doesn’t always apply to first time home buyers.  FHA mortgage are available for those who’ve already owned a home before – however, you cannot use a FHA mortgage for a second home or rental property.

A conventional mortgage requires 5% down payment and very good credit scores.

An FHA mortgage allows you to have mediocre credit.

In the “old” days, credit scores weren’t even a consideration for a FHA mortgage.  Now most lenders won’t do a FHA mortgage with credit scores below 620.  It’s going to be tough to qualify for a conventional mortgage with a 620 credit score.

An FHA mortgage would be the right mortgage if you’ve filed bankruptcy between 3 and 7 years ago.  You won’t be eligible for a conventional mortgage with a bankruptcy filing within the past 7 years.

If you want to take the maximum mount of cash out of your home, the FHA mortgage will allow you to take cash out to 85% of the value of your home.  On a conventional mortgage, your capped at 80% of the home’s value.

So, in conclusion, if you’re credit profile is good, you have equity in the home (if you’re refinancing) or if you’re putting down more than 5% on a home purchase, it is cheaper for you to go into a conventional mortgage.

I talk to borrowers who have great credit scores and have a relatively low loan to value ratio who are advised by loan officers or mortgage brokers to take out an FHA mortgage.  WRONG ADVICE.

Either the mortgage loan officer doesn’t know what they’re doing or they’re trying to maximize their commission (as they will be paid more on an FHA mortgage) – all things being equal.

Again, the mortgage terms are better on a conventional mortgage (which is a mortgage that is bought by Fannie Mae or Freddie Mac) if you have a good credit rating and equity in your home.

For those of you who have filed bankruptcy between 3 and 7 years ago, have mediocre credit or have little equity in the home, the FHA mortgage is the better loan type.

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• FHA Mortgage Questions – “What Is A FHA Streamline Refinance?”

If you’re currently in an FHA mortgage and are considering refinancing that mortgage, you may want to consider an FHA streamline refinance.

The FHA streamline is just what is sounds like – an faster way to refiance the FHA mortgage into another new FHA mortgage (with a lower mortgage rate.).

FHA streamline refinances can be with appraisals or without appraisals.

The benefit of doing the streamline refiance without the appraisal (in addition to not having to pay for a new FHA appraisal) is if you’re unsure about your home’s value or you think you may have no equity in the property or even if you think you owe more than the property is worth, you can still refinance your mortgage and lower your rate and mortgage payment

This way, an appraisal isn’t needed so the loan to value ratio guideline isn’t considered.

To do an FHA streamline without an appraisal you cannot borrow more than the original mortgage amount you borrowed – not including the Upfront Mortgage Insurance Premium.

Also, you are no longer allowed to finance your closing costs or prepaid interest or escrows – however you can finance the Upfront Mortgage Insurance Premium.

On a FHA streamline with an appraisal, you can borrow more than the original FHA mortgage amount.

In addition, (and this applies to FHA streamlines without the appraisal) you must have made at least 6 mortgage payments with no lates and your toal mortgage payment must drop by 5%.

If you have more than 12 months payment history, FHA doesn’t allow more than one 30 day late payment in the preceding 12 months.

If you’re going from a fixed mortgage to an adjustable mortgage ARM, the mortgage rate must drop by at least 2%.

If you’re going from a ARM to a fixed mortgage rate, the mortgage rate can’t increase more than 2% and your payment can’t increase more than 20%.

Please note: you cannot do a FHA streamline refinance if you’re currently in a 30 yr FHA and want to go to a 15 yr fixed FHA mortgage.  So FHA won’t allow a term reduction for the streamline program.

Finanlly, discount points cannot be included in the mortgage if you’re doing a streamline with an appraisal and you want to finance your closing costs.

If you’re paying discount points to buy the mortgage rate down, you must show assets to support the cost of the discount points.  So, if the discousnt points amount to $2000, you need to provide a bank statement showing you have the $2000.

In a nutshell:

• Borrower must have made 6 payments to the existing FHA mortgage (no lates)
• If existing FHA mortgage is over 12 months old, you can have 1, 30 day late, in the last 12 months, but must be over 3
  months ago.
• Benefit of streamline refinance -total mortgage payment must drop 5%.
• If going fixed to ARM, rate must drop at least 2%.
• If going ARM to fixed, rate can’t increase more than 2% (and payment cant’ increase more than 20%)
• Can’t reduce mortgage term, so you can’t streamline from 30 yr to 15 yr fixed mortgage
• Streamline without appraisal, – max loan is now current outstanding mortgage balance plus you can finance MIP, so
  you can no longer roll in closing costs or prepaids

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A lot of mortgage questions I get are about FHA mortgages.

People I talk to do personalized rate searches then ask what’s the difference between an FHA mortgage and conventional mortgage? A natural question for someone shopping for a mortgage.

The first question I ask is “how’s your credit”?

For someone who has poor credit, an FHA mortgage may be a less expensive loan type.

If you have good credit, a conventional mortgage is a better mortgage.  It’s that simple – really.

Also, if you have little equity in your home, FHA may be a better mortgage.  Equity, by the way, is the difference between the current mortgage balance and what the home is worth.

FHA will allow you to finance a mortgage to 96.5% of the home’s value with mediocre credit.  Still pretty good.

On a conventioanl mortgage, you can get 97% financing; however, your credit will have to be over 720.

If you want to take cash out of your home, FHA will allow you to go to 85% of the value of your home, while you’re capped at 80% for a conventional mortgage.  The reason your capped at 80% is because it’s going to be tough getting a private mortgage insurance PMI company to write private mortgage insurance while FHA (or HUD) will insure the loan to 85% cash out of the home’s value.

Another difference that used to be in the favor of FHA is the mortgage insurance premium.

FHA mortgage charges a 1% upfront mortgage insurance premium MIP that is added to your loan amount.

So on a $200,000 loan, the upfron mortgage insurance premium will be $2000.  Oh, by the way, you have to pay that no matter what the loan to value LTV ratio is.

FHA also charges a monthly MIP.

The monthly MIP premiums have increased as of April 2010, making them almost prohibitive.

Again, it doesn’t matter what the loan to value ratio is, you have to pay it for 5 years and you need 22% equity in the property before it can be removed.

On a conventional mortgage, there is no upfront mortgage insurance premium.

You will have to pay monthly PMI if the loan to value ratio is over 80%; however, you can request the mortgage servicer remove the PMI after 2 years and you have 20% equity in the property.

So, in conclusion, if your credit scores are good and you have equity in your home, a conventioanl mortgage would be a less expensive mortgage.

If your credit scores are mediocre and you have little or less equity in your home, a FHA mortgage may be better.

You can do a personalized rate search in the blue Amerisave Mortgage box on the right side of the screen.

It’ll show you conventional and FHA mortgage options, the differing mortgage payments as well as the FHA mortgage upfront and monthly mortgage premiums amounts.  It’s a great tool.

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Watch this video:

http://www.YaleRoth.com In this video post Yale Roth answers one of the top mortgage FAQ “What’s the difference between a FHA mortgage and conventional mortgage”?

Yale outlines some of the differences between the two loan types and explains the benefits and drawbacks as well as which loan type would be more appropriate. 

This video is very informative and will help people decide which loan type is better for them.

Yale Roth is a FHA Mortgage Specialist and provides mortgages for homeowners throughout the United States. 

Call Yale at 561-350-7684 with any mortgage-related problems or visit his rate page at http://www.YaleHomeLoan.com

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