Tuesday, 15 October 2019

Which Is a Better Loan FHA or Conventional?

FHA or Conventional

Today we are going to be breaking down comparing FHA vers Conventional loans. And I am going to tell you it really depends, you have to look at both FHA and conventional loans to see which loan program is going to better for you. So, today that is what we are going to be focusing on. Explaining the guidelines and qualifications and benefits of both FHA and conventional, so you can determine which loan program is better for you.


Let's Start With FHA

Have Almost Taken Up 30% Of The Mortgage Market

FHA loans have grown massively in the last decade, they have almost taken up 30% of the mortgage market share in the United States, that means that of all the 30% of the mortgages that are done right now in the United States are FHA loans.

Government-Backed Mortgage

FHA loans stands for the federal housing administrations, it's a government-backed mortgage, guaranteed by the department of FHA, and the purpose of it is to ensure the lender, whenever the lender makes the loan, and the event of a default or a foreclosure, the FHA will actually pay off the mortgage company if the borrower goes into foreclosure.

FHA loan is a great loan program for first-time buyers, second buyers, people that don't have very strong credit or even people who have fair or even decent credit.

Available Nationwide

it's available nationwide in all 50 states and all the sister countries as well, that partner with America. You can buy a brand-new home, you can build a house with the FHA, you can refinance and take out cash with the FHA. You can own a property.

1.75% Of The Purchase Price

Because it's a government-guaranteed loan, there is a fee that you have to pay to the government's, 1.75% of the purchase price or the loan amount that you financed. Whatever the loan amount you end up financing, that funding fee gets financed into your loans as well.

If you have a $100,000 home, you'd actually finance $1,750, because you have to finance in the mortgage insurance for the FHA. It also has monthly mortgage insurance of 0.85%. Whatever you end up financing on the size of your loan, you pay mortgage insurance monthly for the life of the loan 0.85%

The only way you can actually get rid of the mortgage insurance is actually if you refinance the mortgage into a conventional, another type of product.

If you are with an FHA loan the mortgage insurance stays in there for the life of the loan if you do a 15-years term, the mortgage insurance is actually cheaper, but with a 30-year term it's 0.85%.

 Loan limit - $300,000 to $700,000

There are loan limits anywhere from $300,000 to $700,000 depending on what part of the country that you live in, whether it's New York, California, Orlando, or Houston, it's going to be anywhere from $300,000 to $700,000

DownPayment 3.5%

With an FHA loan, you only need 3.5% down, you don't need 20% down like a lot of banks loan. 

No Credit Score Requirement

With the FHA they have no credit score requirement, you can actually go down to a 500 credit score with the FHA program, and that is one of the biggest difference between FHA and conventional, whereas conventional they typically want to see a 620 or higher credit score, with FHA you can actually go down to a 500 credit.

They are very lenient with if you had issues with your credit and you had extenuating circumstances whether it's medical, job loss or illness, because it's government-backed and guaranteed, they work with you on your credit even if you don't have the best of credit.


Conventional

620 or Higher Credit Score

Conventional is a little bit different like I said you usually have to have a 620 or higher credit score, 

Can Go From $420,000 to $1 million

With conventional, you can go from $420,000 up to a million-dollar depending on where you at in the country.

You Can Get Rid Of Mortgage Insurance

The biggest difference with conventional is that the mortgage insurance comes off on the mortgage when you hit 20% equity. You don't have to keep paying monthly mortgage insurance. Usually, when you hit that 20% equity mark you have been paying on the payment for at least a year to a few years, you can request to have the mortgage insurance removed.

Therefore your payment would be recalibrated and you'd have a lower monthly mortgage payment once that mortgage insurance comes off the payment. 

You Do Not Have To Escrow Your Taxes And Insurance

Also, with FHA loan you have to escrow your taxes and insurance, it's mandatory, with conventional loans if you put 20% down you do not have to escrow your taxes and insurance. With conventional you can do 3% down, 5% down, 10% down and 20% down.

When you put 20% down you don't have to escort your property taxes, insurance. 

You Must Be Out Of Bankruptcy For 4 Years

With FHA loan you can buy a home after bankruptcy after 2 years. But with the conventional loan, you have to be out of bankruptcy for 4 years.

Have To Wait 7 Years After Foreclosure

If you had a foreclosure you can buy a home with FHA after 3 years from foreclosure, you have to waite 7 years with a conventional loan if you have a foreclosure.


Those are the biggest difference between FHA and Conventional, they both have their place in the market. 

Is It a Good Idea To Get an FHA Loan?

FHA Loan

There is a lot of misconceptions about FHA loan, so, I feel like we need to clear that up first. It's not just for first-time homebuyers. You can have multiple homes and still use an FHA. And there is no income limit.

Some of the stuff about FHA that gets misconstrued is mortgage insurance.

Read: How Much Money Do You Need To Buy a House With an FHA loan?


What Are The Good Thing About FHA?

Regardless of how much you put down, FHA has mortgage insurance. The mortgage insurance annual premium, whenever you are putting down less than 20% or getting an FHA loan, you are going to have to have mortgage insurance. It's very affordable especially if you don't have great credit. 

If you have perfect credit, I don't know if FHA is going to be the best choice for you because I think with a conventional mortgage you will be able to get less expensive mortgage insurance. But if your credit score is not great, FHA could save you a ton of money every month.

Read: The Difference Between FHA and Conventional Home Loans


Interest Rate

With interest rates, FHA is also lower than conventional rates. 


What Are The Bad Thing About FHA?

I am going to tell you what bad about it. First of all, FHA doesn't care if you put down 50%, 20%, 30%, 10%, you are going to pay an upfront mortgage insurance premium that gest financed into your loan of 1.75%

For the privilege of doing an FHA loan, they are going to tap 1.75% onto your loan balance. No matter what, even if you have an 800 credit score, that is the way they roll.

If you have good credit and you are putting 5% down, we most likely would not be looking at FHA because the 1.75% is not going to make sense. The other thing that is bad about FHA is that if you are putting down one of the lower payment options, the mortgage insurance is for the life of the loan. 

FHA changes their rules quite a bit, I have seen the mortgage insurance be able to be taken off, not be able to take it off, it can fluctuate for sure, but as of this minute if you buy a house with FHA with 3.5% down, you will have mortgage insurance unless you refinance out of that loan or you sell that house.

If you are thinking it's a 3-years house then you can go for FHA, but if it's a 30-years house you plan to live in, that is definitely something you want to consider. Because we are in an environment where interest rates are going up. So, the odds of you refinancing into a lower rate now is high.

You want to make sure that your lender is having that conversation with you about why you should go for FHA and what conventional looks like. The long-term repercussions of each loan.

You don't want to just have someone go, oh yeah, they qualified me for FHA, why did they qualify you for FHA?

Because unfortunately, government loans are one of the largest profit centers in terms of what lenders and banks make off of loans. They make the most money off of government loans. So, you want to make sure if you are doing a government loan there is a legitimate reason, and there is a lot of great reasons to do an FHA loan.


  1. If you had a short sale or foreclosure, FHA is more forgiving.
  2. If your debt-to-income is higher, FHA is more forgiving.
  3. If your credit score is not great, you can get a much lower payment with FHA.

There is a lot of positive reasons why you would want to use that loan. You want to make sure that you know why you are using that loan. Because, if you have an 800 credit score and 10% down and nothing derogatory in your past, I don't really know why you would be using it.



I hope this is a help as always.

Sunday, 13 October 2019

Who Can Qualify For An FHA Loan?

FHA Loan

This article was written to help you get a better understanding of what it takes to qualify for an FHA loan. And why there are so many different stories about what FHA really has to offer and what it takes to get qualified.

I will be going through the important factors that are going to help you get qualified, or you the realtor hope you get borrower qualified to purchase a new home. So, we are going to go over understanding FHA and some of the misconceptions in how to qualify for an FHA home loan.


Let's Get Started


FHA is great option for first-time homebuyers, for buyers that have a little bit more debt ratio than is allowed under Fannie Mae or Freddie Mac, even borrowers with less than perfect credit. 


FHA Is Not A Lending Program

It's easy to say that FHA is probably the most lenient of all the lending programs out there, but it's important to know that FHA is not a lender, FHA is an insurer and they write guideline and then they give the guidelines to lender and say, if you will approve a loan based on our guidelines, we agreed to insure it, but you can also put any extra conditions on that you feel are important.


That is why it's very important to know which lender you are going to go with, because every lender is going to underwrite FHA a little bit differently in very few.


There is a lot of Flexibility With FHA

It's also good for borrowers with a limited down payment because with FHA you only need 3.5% down, and that actually can come in the form of a gift from a family member or 401k funds, so, there is a lot of flexibility with FHA.


FHA Minimum Downpayment Is 3.5%

With FHA the minimum downpayment is 3.5% if your credit score is over 580, if your credit is between 500 and 579, you would need 10% down plus closing costs. Again, all of that can come from your own funds, retirement funds, 401k or even a gift from a family member.

FHA loans are not just for first-time homebuyers, they are also great for people who have restricted income or they have a high debt ratio, or you are just trying to buy a little bit more home than Fannie Mae or Freddie Mac would be willing to give approval for.


Here Is What They Are Looking For When Qualifying For an FHA Loan.


Verifiable Income

There are two different categories, you either have a person who is employed or a person who is self-employed. And they looked at someone differently, every lender is going to take a complete loan application and run it through an automated underwriting approval system and the underwriting approval system is going to tell that lender exactly what they need in order to verify and get the loan finally closed and approach.

If you are an employed person that means that you go to a job and your w-2 in taxes are taken out, so, your gross income from that job is going to be used to calculate your qualifying income

If you are self-employed, that means that you control your own income in your own expenses, so, they are going to want to see a 2-years average of your tax returns to get qualified. And you have to be self-employed for at least 2-years in the same occupation in order to get approval through FHA.

If you are employed that means you get a paycheck in a w-2, you only have to be on your job for 6 months with a 2-years history. What that means is if you were a college student and you have recently started a job and you have been on in 6 months, that is fine. They are going to ask for a copy of your transcript showing your student and then verify of employment shown that you have been employed for 2-years.


FHA is a Good option For First-time Homebuyer.

One of the nice things about FHA, if for a first-time homebuyer or somebody just getting started, you can also have a non-occupying co-borrower. In the old days, they used to call them Kitty Condos, if you go to university and you want to buy a condo that you can live in all 4 years, but as a student, you clearly wouldn't qualify because you don't have a regular and recurring income,

In that case, the loan could go in your name and your parent's name assuming you are over 18-years of age and the loan would be based on your income if you have any, your debts, and your parent income and debt.

It's a great way for a person who is trying to purchase a home to find a family member that is willing to be a non-occupying co-borrower. Remember that non-occupying co-borrowers, credit score, their income, and their liabilities are all taken into account, so, finding the right non-occupied co-borrower is going to help you substantially in getting approved.


Stability Of Income

They want to make sure that the work history is good as we mentioned, 2-years for self-employed and at least 6 months on the job if you are employed. You really shouldn't have more than 4 jobs in the last two years if you are employed, job stability is very important.

The second thing is if you want to be able to afford the housing payment in any other debts that you have, what they are going to do is they going to make the house payment, taxes, insurance, and any other minimum payments that appear on your credit report in all of those combined need to equal in a good rule of thumb is about 50% of your gross monthly income. 

For example, if your income is $4,000 a month, 50% would be $2,000, and inside of that $2,000 you should be able to pay the house, taxes, insurance, an HOA, homeowners association and any other bills that appear at your credit report.


FHA Does Not Have a Maximum Debt To Income Ratio

Many lenders say that your debt ratio should not exceed 50%, but in reality, FHA does not have a maximum debt to income ratio per the guideline, so, when you run into this situation where a lender say oh, you have to have a 580 credit score or you have to have 640 or even a 680 credit score. That is where the lender has imposed additional guidelines on top of the actual FHA guidelines.


Because FHA says you can have a credit score as low as 500, but with a low credit score like that you are going to have to have 10% down, and you are going to have a good story behind why the credit score is what it is.

For example, maybe you were part of a hurricane, maybe you had a bad accident and the credit report is littered with medical bills, so, there has to be a compelling reason why you should get approved.


Credit Score of 580 and Above, You Only Need 3.5% Down Plus Closing Cost

If the credit score is 579 all the way down to 500, you are going to need 10% down plus closing cost, so, you keep hearing me say closing cost.


What Are The Closing Cost?

Well, you have to order an appraisal, you also have to establish an escrow account, that way the lender can hold taxes and insurance, so, that at the end of the year, the taxes and insurance can be paid for you. The size of the escrow account depends on what time of the year you are buying a home. A good lender you choose will give you more details on that.

But remember the downpayment can be a gift from a family member, and the downpayment itself, the 3.5% or 10% has to come from the borrower or a gift from a family member. The other closing cost can actually be paid by the seller.

Let's say that you find a home that you want to purchase, it's $300,000, the seller can contribute up to 6% of the sales price for your closing costs. Remember that down payment has to come from you, the closing cost can actually be paid by the seller.

Read: How Much Money Do You Need To Buy a House With an FHA loan?

Lets pretend that you find a house that you want to purchase and it's listed in MLS for $310,000, and you have negotiated it down to $300,000, but you need an extra $7,000 for closing cost, so, you can write the contract for $307,000, with the seller contributing $7,000, they still get their $300,000 you agree upon and $7,000 will go towards your closing cost to reduce your out-of-pocket cash, so, you can get the home that you truly desire.


Minimum Credit Score Require

FHA minimum credit score is 500. A lot of people are going to tell you 580, 600, 620, that is because they have overlays and let me help you understand that a little better.

If you went to a bank like Chase, Wells, Fargo, Bank of America, they are all regulated by the FDIC ( The Federal Deposit Insurance Corporation). What they are doing is making sure that all the people who put money in the bank, their money is safe. So, the FDIC says they can't make a loan to anybody when the credit score below 620, so, even though FHA would approve 500 credit scores, if you go rolling into the bank with a 593 credit score they are going to turn you down.


  • Because your credit score is below their internal set number of 620. Some banks say 640, some banks go like 680, but the actual guideline for FHA is 500. So, choosing the lender is very important.


A lot of Realtors don't understand how important this is, they work hard trying to find a customer they get them all lined up and send them to the preferred friend at the bank. And the bank turns them down.


Most people will say FHA turn them down, that is not true, FHA actually did not turn them down, they were turned down by the bank. All you need is to choose a great lender.


The higher The Credit Score - The Lower The Interest Rate

It's always great to have a great credit score, but sometimes the cost of waiting, I hear people say I am trying to get my credit score a little bit higher, and they find the perfect home that they can buy for $200,000, and a year from now that house is going to be $230,000. So, by waiting a year to try and save a quarter on the interest rate, they ended up spending $30,000 more for their home. That is a big mistake.

Read: How Mortgage Interest Works

If you can qualify for the home, buy the home, you can always refinance it a year or two, then you get your credit score increased. 


Choosing A Wrong Lender

If you go to a lender with overlays and they have a higher minimum credit score or they have additional reserve requirements and you don't meet those, they are going to turn you do, and they are going to tell you that you were turned down by FHA. Which again is not true. So, make sure you choose the right lender.


FHA is Not The Lender - FHA Is The Insurer

They write the guideline the lender follow. All lenders don't follow the exact guideline. 


Home Purchase Price

FHA has federal set limits on how much you can borrow with an FHA money it varies by state and by county. Fortunately, the limits are high, the limits are $350,000 in Austin, which is the maximum loan amount. I don't know what the limit is in other states.

That means you can buy a house probably for about $400,000 with a little bit of 3.5% down, you are there, so, that is good news. 


FHA Does Not Have Income Limit

Some of the other programs you maybe have heard of home possible or home ready they have income limits, again based on County. FHA does not have an income limit, you can make as much as you want and still qualify for an FHA loan.


The Draw Back To FHA Is You Have To Have Mortage Insurance

Mortgage insurance, it's insurance that incases you are defaults, the lender gets help in getting the loan paid off if the house sells at a loss. The only drawback with FHA is you are borrowing more than 80% of the value and you have mortgage insurance.

Mortgage insurance protects the lender in case the home goes into default to cover any shortage when the house is sold. FHA used to allow you to get rid of the mortgage insurance once the loan was 80% of the value.




Hopefully, this long article helps you understand what you need to qualify for an FHA loan.

How Much Money Do You Need To Buy a House With an FHA loan?

FHA loan

I am going to show you how much home you can afford using an FHA loan, FHA stands for federal housing administration, it's a federal program that lowers the bar a bit for mortgages so that more people would qualify for mortgages. I mean, people would don't have more money can own a house.

Let's Get Started


Can't Afford 20% Down

Now, a lot of people cannot afford a 20% down payment, even on a $250,000 house, that amounts to $50,000 in cash that you have to have, if you don't have that kind of downpayment, then FHA loan could be a way for you to obtain a home.


Low Credit Score/Bankruptcy/Foreclosed

Another thing that can keep you from getting a regular mortgage is if you have a really low credit score, but not too low, you can go down to about 500, but then if you go down to that much you will have other requirements. If you have a bankruptcy or got foreclosed upon, there are other requirements that you have to meet in order to get an FHA loan.


Can't Get Approved For PMI (private mortgage insurance)

If you don't have 20% down in a regular mortgage, you have to pay a thing called PMI which is private mortgage insurance. It ensures the lender on the portion of the 20% that you cannot pay. Now, getting a PMI requires it's own approval process and if you cannot get that. That means you might have to fall back to getting an FHA loan.

This FHA program is great and it lowers the requirement of a typical mortgage, but you have to understand, it doesn't lower and you get it for free, it does not come for free, you are paying for the privilege of having lower requirements.

Due to all the insurance payments, you are paying to the FHA, you are actually paying more for the same exact home compared to a person with a better credit score that is getting it through a regular mortgage.


Check out this long list of requirements in order to get approved for an FHA loan. 

It's understandable why the FHA puts this kind of requirement in order to get approved for a loan because they are the insured for you. They are insuring against you from defaulting on the loan.

If you ever default and you cannot pay back, they will be responsible for that portion of the loan. Let's go through these requirements and lets me just say that these requirements are not completely set in stone. 

Usually, if you have some reason for something, they would actually let it pass, for example.


Steady Employment For Two Years

If you have some other reason why or you can prove that your position is actually steady without going through 2 years, then they might let that pass.


  1. You need an SSN (Social Security number? 
  2. You need to be United State Lawfully
  3. You need to be of legal age

3.5% down minimum:  

This depends on your credit score. If you have a 580 credit score and above, you can go all the way down to 3.5%, however, if you have a really terrible credit score of all the way down to 500, then you are required to put in 10%. Not to mention that the percent down you put in, affects greatly the insurance that you have to pay. I will go over that later.

  • Only For Primary residence: Which means you have to live in it. 

Property Most Are Approved by FHA Approval: 

If you get approved for an FHA loan, you need the property approval by an FHA approver, this approver needs to be from their organization.


Front End Ratio 31%: 

Which is just a percentage of your income? it's just how much you can take in order to pay for the house, for the mortgage, for the HOA fee, property tax, mortgage insurance, homeowner insurance, you can go all the way up to 31%. But they would allow you to go all the way up to 40%.


Back End Ratio: 

This is how much you pay for a mortgage and all your debt, including, credit card debt, your car payments, your student loan, everything added up. Let's say you add up all of these debts that you have, it cannot exceed 43% of your income 


2-years Our Of Bankruptcy:

If you happen to went into bankruptcy, you need to be 2-years out of bankruptcy before you can qualify for this loan. 


3-years Out Of Foreclosed:

If your previous home somehow you got foreclosed upon, you got kicked out and you go to rent or something, then you have to wait for 3-years after this foreclosure event. Before you can apply for an FHA loan and get a new home.


The Property Must Meet Minimum Standard:

They have a set of standards, you can't have a little hut of property and then you can get a loan on it. They want to be able to sell this thing if you ever default, so, it becomes a lot easier for them to liquidate things. It's like protection on their end, they want things to look good and the property is actually worth something.


Quite a bit of requirement there. 

How you can calculate how much home you can afford.


Upfront Mortgage Insurance Premium = 1.75%

You might wonder what this FHA loan thing is going to cost you. Well, to start off with, when you get the loan, you have to pay a lump sum. It's called an upfront mortgage insurance premium. And it comes in at 1.75% of your mortgages. 

If you pay for a $250,000 house, if that is your mortgage amount after the downpayment and stuff, then you have to pay $4,375. This amount is given to them and you don't get it back. It's not paid into the mortgage or anything, the $4,375 is just a fee.

You can pay instantly if you have that kind of money laying to put on top of whatever downpayment that you pay. 3.5%, 10% or whatever, or you probably don't have that kind of money because you are trying to go for a low downpayment, so, you are going to roll that $4,375 into the mortgage 


Monthly Fees

On top of paying a lump sum, you also have to pay for a monthly fee. This is on top of the interest rate that you are paying on your mortgage. I have another article about How Mortgage Interest Works

Also, read: Who Can Qualify For An FHA Loan?

Just got through that article and see how much monthly payment you can afford




I hope this article was not too completed

Thursday, 10 October 2019

The Difference Between FHA and Conventional Home Loans

Between FHA and Conventional Home Loans

People always ask the question saying should I go with FHA or should I go with conventional. Both of them sound the same and when you talk to a lender, they have similar numbers but no one really takes the time to explain what are the actual differences between each of them. 

In today article I will quick synopsis of each loan, what the pros and cons of each one are, and hopefully, it helps you narrow down which decision to make, FHA or conventional

Let's Get Started


FHA

FHA has been popular for the last 6 years, the reason is that their interest rate has been ridiculously lower. Not only that but even they have released in the downpayment assistance program in 5, where folks were able to get this low-interest rate, it really cost almost nothing to buy a home as long as they have the qualifying factors.

FHA just like VA or USDA is a government-backed mortgage loan, it's very simple, it's like a one-credit score fits all kinds of situation, I think the minimum credit score is 600 if not 580 in special situations. But as long as you qualify for that credit score you have got the whole package.

The interest rate has been historically a lot lower than conventional loans, so, technically unless something changes.

The downpayment is really simple, 3.5%, please note that everything changes, so, let's stick to the basic one for now. You could put more down if you want but if you put more down payment it's not the benefit of the actual loan, it's just going to make amount less.

I have another article where I talk about 



Mortgage insurance

What surprising to a lot of people in mortgage insurance. Mortgage insurance is basically an entity insuring the lender against you, meaning if you decide to default your lender, this insurance is going to kick in and give the money to the lender and then that goes to the government.

With FHA

It sticks with the life of the loan, it doesn't matter if you have a 50% off, 20% paid off, 80% paid off. If you are about to pay it off the next month after 29 years of hard work, it doesn't matter, you are paying that same mortgage insurance for the entire life of the loan.

The only way that is going to change is if you refinance it or you paid it off. It's almost like you could put more money towards it, you can make extra payments towards your house while you are living in it. That is the thing about FHA, you get what you get, you are going to stick with it and that is the same thing you are going to have for the rest of your life.


The Benefit Of FHA

If your credit score isn't that great, you don't have much the downpayment, it's a great option for a first time homebuyer because like I said you could have a 600 credit score as long as you have the 3.5% down. You will be able to qualify, you are not going to get less or harsher thing because you are close to that 600 marks.

For folks that maybe didn't make the right life decisions or had some mistake earlier in their life and now their credit is not as great as they want it to be, well, it doesn't have to be that bad. Their assistance programs do require you to be closer to 660 but if you have a 3.5% downpayment, you could definitely do standard FHA.


Conventional

Conventional is a mortgage loan that is conforming, conforming meaning it's under the guideline of Fannie Mae and Freddie Mac. Which are government corporations but their loans are conforming to their guidelines? They are technically about the same guidelines of FHA, there are some very slight differences but it's still very much secure mortgage 

Favors Buyer With Better Credit Score

Because conventional is not backed by the government there is a lot more at play here. This is not definitely a one-credit score fits all situations,

Let's say the minimum credit score for a conventional might be 620, well, if you have 620 and another buyer next door to you is at a 750, that buyer at 750 is going to get a lot better terms then you. They are going to get offered a better interest rate, they are going to get off with less mortgage insurance, and overall they are going to get a better package and they have a lot more negotiating power, meaning they can go to several lenders and they can even compete for their business because they know that is a very solid buyer.

If your credit score is at 621 or 620, although you are going to get a thing and you can shop it around you are not going to get the best interest rate, you are not going to get the best mortgage insurance and really there is not much you can do about that unless you stop or your credits score is high.

If you have been very meticulous about your credit score, you took care of it really well, and it's something you have great pride in, this is a great option for you, you will see the reward in it, whereas FHA is doesn't matter, with conventional you can actually get a reward from you taking care of your credit.

But with conventional you will have a higher down payment, the minimum down payment for a conventional product is about 3% to 20% 


Interest Rate Tends To Be A Bit Higher Than FHA

They are not that different now because maybe conventional is still a little higher but back in the day, it was at least 1 to 2 to 3 points higher than FHA. Even now it's still 1 to 2 point higher in some situations depending on your credit score.

But if you are barely out of 620 and you are again looking at conventional and FHA product, even though conventional you are putting 3% downpayment and then FHA 3.5% downpayment. It might make more sense to go with FHA because the monthly payment will be less because the interest rates are a lot lesser. It's a little bit less than the conventional one. 


  • A lot of people don't think a half-point or a 1 point of interest affects you, but at the end of the day, it might be a difference of $50 to $100, depending on your price range.

Huge Advantage Of Conventional Product.

Remember we talked about the mortgage insurance with FHA, whatever you get when you first get your home, that mortgage insurance, it's what you are going to pay for the rest of your life or the 30 years unless you decide to refinance it or sell it and get another home.


Mortgage Insurance Drop Once You Reach 80 to 20 Loan To Value

Conventional, it's a little bit different, as soon as you reach about 80 to 20 loan value of your home, that mortgage insurance gets booted out and is no longer on your monthly payment.

Lets me explain

Lets me just use the number $100,000, lets say you buy a house for $100,000 and you put 3% down, your total loan when you buy the home is about $97,000, so, as you live in the home you are going to be making payments, so, maybe after 1 or 2 years you are at $90,000, $94,000, lets just say about 8 years later you owe about $80,000 on the home and your original value of that was a $100,000.

That means that your loan is $80,000, the value of the home is $100,000, so, you would be at $80,000 to $20,000 value. But wait, that really doesn't make sense right, and if you did catch it, well, here is the thing.

When you are living in a home, you are paying your mortgage down and your loan goes down, but guess what, if the market is good which is how it's been recent, your value also going to go up, so, there are like two factors working toward.

But here it makes sense, if you want to put more for the principal it helps you widen the gap a little more, so, as your home gets more value because the markets going up, your home is getting paid and maybe if you make extra payments, it goes even lower, I have seen people meet that 80 to 20 of value about 3 to 5 years.

The mortgage insurance which could be a $100, $200, on your monthly payments gets knocked out, now you are purely paying your mortgage, your interest, your taxes, and your insurance, that is it, you are not paying anything other additional. 

I like seeing progress, if you want to make the extra effort to make extra payments it's going to help you because if you can reach that 80 to 20 loan value a lot quicker than most people, then you are going to be able to mock and save yourself those extra few $100 a month, whereas with FHA you are not going to ever be able to take that off.



Conclusion

I'm not basing FHA, FHA is not a bad product but my recommendation is if it's a first home that you know you are only going to live for a few years, maybe 3 to 5 years and that is the best options you can because your credit score isn't that great, 

Well, get that home. It's better than renting, don't throw your money paying rent, get the home and live in there comfortably maybe fix it up a little and then when it's time to buy the next home, you are going to sell that home, get the equity from it to pay your down payment for the next home and make sure your credit is as high as possible. 

How To Get The Best Mortgage Interest Rate

Best Mortgage Interest Rate

In this article, I am going to talk about getting the best interest rate on a home loan. I am going to go over two important tips that you really need to know about, they are probably more important than the interest rate that you are going to get. 

Before I start talking about how to get the best interest rate for a home loan. I want to go over 2 things that are going to be really important, maybe even more important than the interest rate that you are going to get, at least initially.


1. Choosing The Right Lender

It's about getting the right loan office because if you hire a loan officer, you need to make sure they know what they are doing, they are knowledgeable, they understand things, they are looking out for your best interest, they are going to close the deal on time. You want to make sure you choose your loan officer in your lender very carefully.


2. In The Right Loan Program

Because at the end of the day if you are in the wrong loan program it doesn't make any difference in the interest rate. 15-years, 30-years.

A good loan officer will talk to you and say, tell me a little bit about your situation, how long are you going to be living in the home, are you going to be buying the home, or you are going to be renting it out, are you going to be relocating in 5 years? Whats is your situation.

Base on your situation, they would put you on a different loan program, maybe on the 30-years fixed or a program that is amortized in 30-years, and of course, the interest rate would be a lot lower. There is a different loan program, it's not always about the interest rate.

Let's talk about the interest rate.


Knowledge Trust

You are choosing what lender to work with, you want to get the best interest rate, the first thing before anything else is to make sure you pick a loan officer that knows what they are doing and you could trust them. Because nothing else matters if you don't have that.

What you want to do is you want to go to 3 lenders, maybe you go to a mortgage broker, or a bank or credit union, whatever. And what you want to do is you want to make sure you have given them all the exact same information and you are calling them at about the same time on the same day. becuase depending on what is going on, the interest rate could change from day to day slightly.

Maybe you call one company and you call them 8:30 in the morning and they haven't gotten their rates for that day, but then you call the other two maybe later in the afternoon, so, you just want to make sure you call them in about the same time.

You want to make sure the type of loan is the same, if you are going on to conventional or FHA, VA, USDA, whatever you are going on, they all know that you want to give them the same loan amount, so, if you are $260,000, they all at $260,000.


Get a 30 Days Quote

But where most people miss it, most people don't think about talking of days that the interest rate is a lock, and that is vitally important

Typically most lender just a regular quote without the buying saying anything should be quoting a 30-days lock. But some of them don't, because in a 7 days lock, there is going to be less liability for the bank or whos is ever lending the money, the longer you go, the more liability, so, the interest rate will go up slightly.

There is going to be a good size difference between interest rates on a 7 days lock and a 60-day lock. If you think you are going to be closing in maybe 45 days out, make sure you tell them all, you want a 45-day lock.

That is really important. And then what you do is you get the information back and you have to look at it very closing, because look at banks, bank is typically a little bit higher on interest rate but less in closing cost, were there a broker, sometimes a credit union they have a lower interest rate but their costs are a little bit higher.

Just look at all of it and figure out the person who you feel the most comfortable with. The person you want to work with and go with and then see if they are the lowest, if they are not the lowest then give them the opportunity to compete, take the other two or the other one and then give them the estimate, it's called a lender estimate, and send them the estimate and say hey, can you meet or beat this? And see what they have to say.

This is going to be a win-win, you can't a loss in this situation.

Home Mortgages For Dummies - How Does It Work

Mortgages For Dummies

We are going to be talking about mortgages for dummies. In todays world there are a dizzying array of mortgage available and this sometimes makes it confusing to people who are trying to learn about them. But at the very hard of it, just realize this. A mortgage is nothing more than a loan that is secured by real estate. 

Have You?

At some point in your life you have probably received a loan or given a loan to somebody, maybe it was something very simple like loaning your bike or maybe loaning your friend 10 bucks.


Loaned Money To Buy A Moped

But just realize a loan is a loan at the end of the day. For example, lets just say you needed to buy a moped for work, you needed a form of transportaion you had no money, so, you ask your roommate for the money to buy the moped.

All loans come with certain terms, so, lets say that your roommates wanted his money back in one year at 4% interest with monthly payments of $50, and keepoint. If you default, he gets to keep your moped.


Read: What Documents Do You Need To Get Preapproved For a Mortgage Home Loan?

Mortgages Involve Real Estate

A mortgage is no different except that it involves real estate. If you violate the terms of the mortgage or the loan, they are going to take back the piece of real estate as opposed to a moped.

Terms:
  1. Long Time Periods (30 Years) at 4% Interest
  2. Monthly Payment

Although there are many different types of mortgages, they usually have these types of terms. Long periods of time say 30 years at a certain yearly rates like 4%. Monthly payment and they are amortized over this time period.


Amortization Is Difficult To Understand

Amortization is one of the building blocks of the modern mortgage, and it's very ironic becuase amortization is very difficult to understand and it's never taught in publich schools or any personal finance courses.


  1. Payback the entire loan at the end of the year plus Interest
  2. Equal payments over each month

In our moped example, our roommate wanted us to pay the payment in equal payments each as opposed to paying the lump sum of the moped as well as the interest at the end of the term. That is the keypoint of amortization.

Essentially with amortization you are paying off a little bit of the moped and a little bit of the interest over each month and hopefully by the end of the term you are going to end up owning the moped and having paid the interest that your roomate wants you to pay.


Not Amortized - Huge Payment

With a non amortized loan you would have to pay the whole entire moped off and you'd have to pay all of the interest at the very end of the year, when the loan came due.

Mortgage Example

A very simple mortgage example would be this. 


  1. You are buying a $100,000 house
  2. You are getting a yearly rate of 3.92%
  3. It is amortized over 30-years

Read this article: How Mortgage Interest Works

You will see what your monthly payment would be each month. If you read the article above.


Negotiate The Most Favorable Terms

Personal loans, moped loans, home morgages, they are all the same and if i can give anybody the best piece of advice when you are trying to get a loan, is you want to negotiate the most favorable terms especially for a mortgage which is very long and very expensive.

The best way to negotiate a loan is

  1. Put down the lagest down payment you can.
  2. Negotiate rate down as low as possible

The lower the rate the bigger the downpayment, the less risky the loan and the lower the payment. 


Government Subsidized Loan

  1. Low Rates
  2. 30 Years
  3. There Is No Catch

If you are a first time homebuyer and i highly suggest you check into government subsized loans which have very low rates, loans amortized over 30 years and becuase they are governement subsidized there is really no catch they are government programs aimed at helping first-time homebuyers buy houses.


Bank Scrutinize You Financially

One thing you must take into consideration when getting a mortgage is that you are going to have apply for a mortgage through a bank or some type of lender, these people are going to scrutinize your financial history.


How To Get A Good Loan

  1. Good Credit 
  2. Stable Income 
  3. Have a saving, 401k, IRA, etc.

In order to increase your negotiate power and increase the likelihood that you can get a good rate on a loan, you need to impress banks and lending institutions with things like good credit, a nice stable income and assets in savings account 401k or some type of bank account.

How Mortgage Interest Works

How Mortgage Interest Rate Works

Many people when they go to purchase a house are looking to finance that purchase and yet very few people understand exactly how the interest works on their mortgage. So, what I want to do is take a few minutes and demonstrate exactly how the interest amount is calculated on a mortgage

We are going to look at a property where the purchase price goes like this below, I just keep the math easy.


30-years Loan

  1. Purchase Price - $100,000
  2. Down Payment - 20%
  3. Principla - $80,000
  4. Interest Rate - 5%
  5. Monthly Payment: Monthly principel and interest - $492.46

In other to pay off a loan with those terms in 30-years, our monthly principal and interest is that amount right there. $492.46.

Now, in other to calculate the interest on this, this is what we will do. 

We are going to take out our original loan balance for our first payment which is going to be $80,000, and we are going to multiply that by the interest rate which is 5%, then we will divide that by 12 for the months of the year, which gives us an interest payment for the first month of $333.33.


  • Interest Due 1st Payment: (Loan Balance x Interest Rate) 
  • $80,000 x 5% / 12 = $333.33

Alright, we know we are paying $333.33 an interest in the first month, and now we will see how much that leaves our payment towards the principal.

Now, we take our monthly principal and interest payment amount which was $429.46, we subtract the interest due which we just calculated of $333.33 and that leaves our principal due on our first payment of $96.13


  • Principal Due 1st Payment: Monthly P&I - Interest Due
  • $429.46 - $333,33 = $96.13

When we add these two numbers together we get our principal and interest payment of $429.46


  • Total Due 1st Payment (P&I): Principal + Interest 
  • $333,33 + $96.13 = 429.46

  • Loan Balance After 1st Payment = $79,903.87

Which you can see is the amount that we were told in the very beginning. After our first month's payment, our loan balance which started at $80,000 is now down to $79,903.87. 

Although you paid 429.46, your loan balance only decreased by $96.13, because that was the only amount that actually went towards the principal. 

Second Month

Now, lets do one more month here and look at our second payment, we would use the same math, we are going to take our loan balance which is the new amount of $79,903.87, we multiply that by the interest rate of 5% and then again we divide it by 12 = $332.93. And now you will see that the interest due our second payment is down to $332.93, which is a 40% decrease from on the first payment


  • Interest Due 2nd Payment: (Loan Balance x Interest Rate) 
  • $79,903.87 x 5% / 12 = $332.93

For the principal on the second payment will do the same process and we subtract our monthly principal and interest payment of $429.46, we subtract the interest due which we just calculated and that gives us the principal due on our second payment of $96.52, so, the principal has gone up by 40%.


  • Principal Due 2nd Payment: Monthly P&I - Interest Due
  • $429.46 - $332.93 = $96.52

Again we add those two together and it is again 429.46.


  • Total Due 1st Payment (P&I): Principal + Interest 
  • $332.93 + $96.52 = 429.46

  • Loan Balance After 2nd Payment = $79,807.35


Points To Remember


  • Each month your interest paid will decrease and the principal paid will increase.

  • On the very first payment that is the highest amount of interest that you will ever pay on your mortgage and each month those numbers will change in favor of the principal being paid, it won't change by much but it will change a little bit. And of course, the main benefit of a mortgage is that unlike rent your monthly principal and interest will never change.


Although the interest the principal ratio changes each month, your actual monthly payment does not change ever.