FHA Loans: A hot subject (guest post)
(This is a guest post by Aaron Dehart, mortgage planner at Morgan Financial.
You can send him an email for additional questions regarding FHA: Aaron.DeHart@wjbradley.com)
FHA Pricing has been a hot subject as of late.
Although interest rates are still great when it comes to Government Loans, the volatility of the Market Place and the recovery of the Sub prime mess are still rearing its ugly head. As a result, every lender has gone to a risked base pricing system when it comes to Government loans.
Now this does not mean that FHA/ HUD have gone to this but it is the individual banks that are protecting their own interests. For example many banks are requiring a minimum Credit Score of 580 now for them to insure the FHA Loan; others are even higher with a 600 FICO score requirement.
Now this does not mean that someone can not still qualify for an FHA Loan because FHA uses what is called a total score card. Meaning they look at the big picture, this not only includes the credit score, but also takes into consideration time on current, credit history for the past two years, debt to income ratio, loan to value, amount of reserves, etc.
What does all this mean? Obviously the stronger the candidate, good credit, good job history, lower debt to income ratio, good reserves in the bank, will be rewarded with an excellent interest rate.
For example if you have a credit score of say 700, 3 months of reserves and good job history, then you are rewarded with an interest rate of between 6 and 6.25% depending on market conditions when you lock of course. If your score is below 600 and depending on if you get an automated approval, (Automated Underwriting) we will discuss what that is later. Then the banks are going to charge you the selling premium, very simple the higher a risk the more banks have to pay to sell your loan on the secondary market.
The money has to come from somewhere so the banks are going to charge that upfront in pricing to ensure they have a loan that can be sold. Also it is important to point out that if a couple is married, the spouse’s debts must be used in qualifying. The lower mid credit scores of the two borrowers is being used. Example Husband 680, wife is a 575, the 575 score would be used for pricing. It is possible to remove the lower fico if the individual borrower can qualify on their own, however, the debts of the spouse will still be used in qualifying.
So you can see that FHA can fluctuate from having a right at market rate to having a higher than market rate determined by the overall scoring factor that FHA has. FHA are still the best loans to get for someone who has below a 680 FICO score, limited reserves and little or no money down for the transaction, especially if the property is located in a declining market area. The pricing adjusters are far more extreme on Conventional loans if you do not fit into those categories.
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