FHA Mortgage Insurance

This video breaks down FHA mortgage insurance in a simple, real-world way, explaining why it exists, how it works, and why it’s often misunderstood. Deb covers both the upfront and monthly mortgage insurance premiums, why FHA loans allow lower credit scores and smaller down payments, and how these benefits help more people become homeowners. She also compares FHA loans to conventional loans, highlighting differences in interest rates and long-term costs, and explains why mortgage insurance doesn’t automatically go away with FHA loans. Ultimately, the video emphasizes that FHA isn’t a “bad” loan program, it’s a powerful tool when used correctly, and encourages buyers, sellers, and agents to better understand the numbers before making decisions.

Transcript

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Hey everyone, welcome back to All Things Home Loans, Credit, and Real Estate. I'm your host, Deb, the Mortgage Queen. So let's start learning. Hey, it's Mortgage Queen. I am here. Wanted to talk a little bit about FHA mortgage insurance today. Uh mortgage insurance premiums are kind of a necessary evil. I explain them. Oh, this is going to be public. So good luck to us all with this. But usually I explain it this way: mortgage insurance is a pointless fee that we have to pay unless your house goes into foreclosure. That's my feeling on it. Although it isn't accurate because we wouldn't have the higher amounts of loan availability to us. So the mortgage companies that lend the money wouldn't lend as much without that mortgage insurance because they're basically saying, hey, we'll lend more money, but if this goes south, mortgage insurance people, you're picking up the bill. You're going to help us out here. So I want to explain just a little bit about it. FHA is the Federal Housing Administration, and they're just an entity. We have Veterans Associations, we have Fannie and Freddie, which is conventional, then you have FHA. The greatest thing about FHA is they allow us to have lower credit scores, higher debt-to-income ratios, and qualify with a little bit more damage, I guess, to our credit profile. They're a little bit more lenient when it comes to, hey, this bad thing happened, and we can explain why. And yep, we'll give you a loan. So they're a little bit more lenient that way. There are uh a lot of little pieces to an FHA loan that um are kind of fun. They're really kind of fun. And what's crazy is an FHA loan will let you get cleared onto a 500 credit score. It gets ugly, and there's a lot of little things that go into that, but uh 500 credit scores is it. And you have you have to do some pretty major damage to have your credit score be that low. Um, I've seen a few 400 credit scores in my days, but uh it's you look at it pages and pages and pages of collections, uh things that are just never taken care of, and no credit scores to help, or no, no credit lines to go to have the scores go the other direction. So there's that. But um FHA. What we have to think about is having mortgage insurance is not a slap on the wrist penalizing you, anything like that. When it came out, its purpose solely was to help people get into a home without having to wait for a 20% down payment. Now think about it right now. In our area, our price points range anywhere from probably 350 to 500, really is kind of our price points that that are a decent home, like a home that you could raise your family in that if you had a bigger size family. Think about if you had to have 20% down. 20% down on $350,000 is $70,000. I'm just wondering by a raise of hands, you know, anybody out there, do you have $70,000 sitting around? $500,000 is a hundred grand. If you think about it in a way that 3.5% down, which is the minimum for an FHA loan, that's workable. That's hunker down, put some money in the bank, take advantage of coupons, and don't go out to dinner and make sure you're making dinner at home and don't hit the local coffee shop in the morning. Just those little things, you just really narrow down your budget. And within a really reasonable amount of time, you could save for a down payment. Also, we have down payment assistance programs, but I'm not going to go up on that tangent. So there's two sides of FHA mortgage insurance. The FHA mortgage insurance has an upfront premium, which is 1.75% of what our uh loan amount is, and that is actually tacked onto your loan. That's one big misunderstanding is that um I do a loan for 96.5% of the purchase price. That's you know, 100% minus 3.5. My first mortgage becomes 96.5%. I'm actually doing a loan 1.75% higher than that. So 96.5 plus 1.75. I'm actually doing a loan for 98.25% of that purchase price because I'm going to finance in that upfront mortgage insurance premium of 1.75. Kind of confusing, but just know if you're doing an FHA loan, your 3.5% down payment is actually going to look like you didn't put as much as 3.5% down because we're financing in that mortgage insurance. Now, alongside that 1.75 fee, you've got monthly mortgage insurance. And it's a factor depending on what your down payment is. If it's 3.5 or 10%, um, it's going to be either 0.55 or 0.50. And that is divided over an um a 12-month period of time. So we take our loan amount, multiply it by 0.50 or 0.55, and divide that by 12, and that becomes what your monthly payment is. Now, this is the frustrating part about FHA. That mortgage insurance never goes away. The thought of when I get my 20% equity position, it'll just go away. No, it won't just go away. The the mortgage insurance factor is a percentage. And so as you pay your principal balance down, that mortgage insurance also reduces down. And if you look at an amateurization schedule, you're going to see, you know, every time that hits the 12-month mark, it's a little lower, a little lower, a little lower, a little lower. Um, eventually, obviously, when the home is paid off, it goes away. In order to get rid of that mortgage insurance, we have to refinance and put it into a conventional loan or a VA loan if you're a veteran, but um a conventional loan and have 20% equity, or you're still going to have mortgage insurance somewhere. The thing that you have to remember is if you don't want to put 20% down, these programs were put in place to help offset that need. So as we have such a bad taste in our mouth about mortgage insurance, and and I have a new, I have an opinion about it. I understand, but as we have a bad taste in our mouth, we have to remember if we didn't have mortgage insurance, we would still be required to 20% down payments. What would that do to us? Obviously, our financial worlds would be different because people would have learned to save money or they would have been renters forever. But you kind of go off on this negative tangent about the rich people would have all the rentals and nobody could afford to even buy a house. It's like not good. It's not good. So mortgage insurance actually is a really good thing. Um, so in regards to um the piece that probably makes me the craziest, I think it was about 2013 um the rule changed that mortgage insurance wasn't gonna go away. There was the 1.75 fee plus the 0.55 or 0.50 wherever you were at, and that mortgage insurance would never go away. And my first thought, this is me, like soapbox dev, how much money sits in that pool? Seriously, how much money sits in FHA right now for them to pay out on losses? And it'd be interesting. I'm actually gonna research this a little bit and I'll throw it in the comments. But um, how much money sits there and how much does FHA actually pay out? That's an asterisk that you'll want to go to the comments and actually read. But um I was frustrated when that came out and it said, you know, once you hit 20% equity position, we don't really care. You're still gonna have mortgage insurance. Sorry, it is what it is. That's a lot of money. That's a lot of money if you think about it. On a $300,000 loan at 1.75, right from the get-go, you you're plugging in just under six grand into that into that um pool. Well, measly owned only Deborah here. I close three million dollars worth of FHA loans. That's that's a lot of money, just in just little Deborah here. And I um it bothers me. It really bothers me. But anyways, um, and then this is the positive. Here's the positive. As I'm I'm not, I'm not gonna go down that negative path. I have to stay on this positive thing, but um conventional interest rates. Now there's an asterisk next to this, but kind of standard, conventional interest rates are higher than FHA mortgage insurance mortgage rates. So today we could lock on a down payment assistance loan with our Idaho housing program. This is just a scenario as of today. The rate at 5.75 is FHA, 6.375 is conventional. That's a big difference on interest. So you think about 6.375 on conventional. I still have mortgage insurance because I'm only putting my minimum 3% down, but my mortgage insurance goes away when I hit 20% equity. All right, all right, that's great. But I'm still the remainder of that loan at 6.375 interest instead of 5.75. Then I compare it to a 5.75 rate and that mortgage insurance that never goes away, but it's on a tiered basis. So it goes down as the principal balance goes down. When you look at it, sometimes there's not much difference in how much you've paid out. It's kind of a wash. So as FHA kind of has a little bit of a missunderstanding, what's the right word? Um, it's just not given credit, I guess, for the type of program that it is. But um if you line up an amortization schedule, conventional at this higher rate, mortgage insurance that goes away, FHA at this rate, mortgage insurance that just tears down and never goes away until the loan's paid off. I would dare say most of the time you'll see that it's a wash at the end with what you've paid in into higher interest or more mortgage insurance. It's a wash. Don't get hung up on that being an issue. Um, obviously, refinancing is an option. If you do have an FHA loan and your credit scores were lower, then fast forward two years, the rates drop, appreciation happens, you've paid your balance down a little bit, you have increased your credit scores because your mortgage uh line of credit hits your credit and it actually helped those credit scores increase. Maybe we can refinance it into a conventional loan and get rid of that mortgage insurance. Still, the offset of making sure that that interest rate is low enough to make sense for that refinance just to get rid of mortgage insurance isn't the answer. We have to run those calculations and make sure that that is actually cost effective. You think about my scenario of 6.375 mortgage insurance on a conventional or 5.75 FHA mortgage insurance that doesn't go away. Um fast forward two years, I'm still at my 5.75 paying mortgage insurance, but maybe I bought a house that didn't have a finished basement and I hurried and finished the basement. Now I have a 20% equity position. All right, great. What if conventional rates were at 5.25 and I had a 20% equity position? So I'm gonna go from 5.75 to 5.25, get rid of my mortgage insurance. Even if we could waive closing fees, it may not be worth it. You have to think about restarting. You've lost those two years, and uh now you're starting back over in the 30-year mortgage. And I have a calculator and I can manually do this based off of my seventh, eighth, and ninth grade algebra years. That's fun. Not because I was stupid in school. I took algebra, what, pre-algebra, algebra, algebra two. I loved algebra. It's probably why I can do mortgage loans because it's always solving for A. But anyways, um it's don't just jump out of an FHA loan and do a mortgage insurance panic move and uh and get into conventional. We've got to run the numbers. You just have to run the numbers to make sure it's gonna be um worthwhile. Let's talk about a home that's been listed with conventional or cash only. That is super frustrating to me. In the seller's market, that may be the case that you can do that. In a buyer's market, not so much. In a buyer's market, you really should be as a seller asking why conventional only, why cash only? And if your real estate agent can't answer that, first of all, make them call me because I can explain why we need to do FHA or at least have it as an option. But you're cutting yourself out of so many buyers. If you say cash and conventional only, and um I'm gonna, there's a lot of data out there with my program of the FHA 203K program with the renovation piece of it. So you can definitely learn about it, but sell the house as is, allow FHA financing and let me just do a renovation loan behind it. That's huge. That's a huge selling point. So you got this 1920s home that totally needs to be gutted with electrical and plumbing and carpet and floor coverings and maybe new cabinets and new kitchen, and it doesn't have a garage, and we want to add a garage. Great, sell the house as is, allow FHA, and I'm gonna finance in a renovation loan behind it. So I think that FHA is big, big, big hit to its um what is the word I'm looking for? Um reputation. That like the FHA's reputation is is just brutal and it doesn't need to be. The mortgage insurance is offset by a lower payment or lower interest rate usually. Uh the repairs that get called out on appraisals can be done with a renovation loan if they can't be just you know minor things. And some of the repairs that are there um are needed. Chipped and peeling paint will protect the wood. Uh don't leave paint chips around for little kids to eat. Um sloping away from the home. Well, if it rains and the water doesn't run away from the house, what is that doing to your foundation? Uh steps that are over a certain height need a handrail. Okay, so you don't want people falling off the steps. If you really look at the requirements that FHA puts out there for appraisal side of it, they're they're a safety thing. They're not a they're not annoying if you really understand it, but um FHA programs are really, really good. I remember when we got FHA in my office, we used to do subprime, and uh that was the one day out of bankruptcy. I'm sure people are listening to this thinking, yeah, that's the reason why the market crumbled is because the subprime industry. There's definitely some there's some truth there, but um when we got FHA, I was horrified. Like, oh my gosh, I don't even know how to do these types of loans, but I instantly fell in love with them. But um we have to remember a couple of things. FHA mortgage insurance is there for the life of the loan, interest rates lower. It allows for renovations to be financed in with a special program that we've got that I'm like the queen of that I absolutely love. And it's just a lot more lenient on credit situations, uh past credit issues, bankruptcies, uh foreclosures. Um, on the FHA side, two years out of a bankruptcy, three years out of a foreclosure. Um conventional is different. You gotta be four years out of a bankruptcy, and the foreclosure can't even exist on your credit report if you're gonna get away with a conventional loan. It just won't give us an approval. And credit scores can be so much lower. Mortgage insurance just is what it is, where conventional mortgage insurance adjusts for debt to income ratio, credit scores, um loan to value, all of that goes into the conventional mortgage insurance and it starts nickel and diming that a little bit higher and higher. I love this program and I think FHA has definitely got its place. We always do the best that we can to get into conventional just because sometimes that is a little bit of a better deal, but it's on us to run the numbers and make sure that we are putting you into the right loan program for your needs. So if I could leave you with one little bit of advice. First of all, FHA is not bad. If you're a seller, if you're a buyer, if you're a realtor, FHA is not bad. If you think that FHA is bad, you need to get educated. That's where it's at. If you think FHA is a bad loan program, education is your problem. And uh learning a little bit more about it, understanding it, the ins and outs of it, education. Education is where it's at. Um, all right, so with that being said, Mortgage Queen here talking about FHA mortgage insurance, how I love it, how I hate it, how I have a love-hate relationship with it. That is all in, that is all true. Um, but ultimately it gets home buyers into a home that um crap happens to good people, and that gives us the ability to get people into a home with uh little to no down payment. So I leave that with you today. FHA is where it's at. If you are out there wondering, wow, how do I finance this home because my seller hates FHA? Well, let's educate. Have a good day. Thanks so much for listening. I really appreciate it. So stay tuned. We are gonna learn some more next time.