FHA loans were once the most popular loan option for buyers with less than perfect credit scores and who didn’t have a lot of money to put forward as a down payment for their loan.
In today’s market, much of the incentive to get a FHA loan has started to disappear. New mortgage rules and numerous fee changes have turned the tables on this once popular home loan option.
A Brief History of FHA Loans
During the subprime boom from 2003 to 2007, only around 10 percent of the loans that were originated each year were FHA loans. This all changed after the financial crisis hit in 2008. Borrowers turned to FHA loans because they were easier to get and they required smaller down payments than many of the other types of loans.
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It’s been estimated that around 40% of the loans that were originated after 2008 were backed by the FHA. What’s happened in the preceding years has been a slow erosion for much of the incentive to get an FHA loan. And the main culprit is mortgage insurance premiums. Only a few months ago the FHA changed its rules to require borrowers to pay form mortgage insurance for the life of the loan. This has pushed many borrowers into looking for the best deals they can get on private loans.
FHA vs Private Loans
FHA loans require borrowers to pay up to 1.35% of the average outstanding balance of their home every year. This premium then gets added to the monthly mortgage payment that the borrower makes. While 1.35%, may not sound like a lot consider this. For a home loan of $200,000 that will add up to nearly $30,000 of extra payments over the course of only ten years. Borrowers can also expect to pay an additional charge of 1.75% once the borrower gets the loan.
“FHA loans really used to be a first option for home buyers with a low down payment,” says Scott Schang, a branch manager for Broadview Mortgage Katella in Orange, Calif. “Now, I see people doing them because they have to and not because it’s their first option.”
Not only do private loans come without upfront fees, the cost of mortgage insurance on an a private loan is no substantially less than it would be on a private loan. In fact, it’s possible to avoid paying any mortgage insurance at all with a private loan. If you are able to pay 20% down off the price of the loan, you can entirely skip having to buy mortgage insurance.
Borrowers who feel that they may be stuck getting an FHA loan shouldn’t feel discouraged if they don’t have the money for a down payment. There are numerous down payment assistance programs that can help fund the down payment. These can often be the better option than what is offered in terms of aid for FHA loans.
Younger borrowers should also take comfort. These down payment assistance programs are not strictly for lower income borrowers. Being able to qualify for a private loan can mean earning between 80 and 120% of the median income in an area. So, before you spend potentially tens of thousands of dollars unnecessarily on high mortgage insurance premiums, look into the possibility of getting a loan from a private lender.
