11/9/2023 – FHA vs. Conventional

Rate matters, and the lower the rates, the better business is, or so it seems. One thing I want everyone to understand is the difference between FHA rates and conventional rates and the payment difference based on where we are right now. FHA has been running between .625% and .750% better than conventional loans lately, but there is more to the story, and that’s what I want you to understand. Everyone wants the best deal, lowest rate, lowest fees, and also get the best advice. You can only do so much to control where your buyers go for their loans. We do appreciate those of you who go above and beyond to get your buyers to us. Still, when they make the most significant commitment of their life outside of marriage and if they go with a lender, you don’t know, and they may be getting the short end of the stick even though the rate and payment look a little better!

This is off the heels of what happened yesterday! Buyers with a great credit score (765) entered escrow a week ago for $750,000.00 with 5% down and were shopping rates. They came to me yesterday after they were unhappy with the lender they went with originally and wanted a quote. Everything was perfect, and the lender charged them 1 point and did an FHA loan. Out of curiosity, I asked why they were going with FHA and paying a point, and they said that the lender recommended that. I continued to ask where they felt rates would be in the next 1-2 years, and they answered that they would be much lower. I continued to explain why they should look at the 0-point options and a conventional loan and compare it to an FHA loan. Here is the breakdown below and my comments too!

FHA Loan – $750,000.00 Purchase Price – 5% down $712,500.00 Base Loan Amount + Upfront Mortgage Insurance Premium $12,468 = Total Loan amount $724,968 @ 6.99% (7.71 APR) with no points – Principal and Interest $4818.36 + Property Taxes $781.00 + Insurance $175 + PMI $296.88 = $6071.24

Conventional Loan – $750,000.00 Purchase Price – 5% down $712,500.00 Loan amount @ 7.625% (7.798 APR) with no points – Principal and Interest $5043.03 + Property Taxes $781.00 + Insurance $175 + PMI $207.81 = $6206.84

As you can see, the FHA loan is $135.60 lower, but the UFMIP was added to the Loan at the cost of $12,468. The breakeven on that would be 91.95 months. I didn’t even discuss that FHA has PMI for life, and the conventional loan will allow you to remove PMI in as little as two years.

Again, paying points doesn’t make much sense in this market as most believe they will refinance in 12-18 months.

FHA makes sense with lower credit scores but rarely makes sense with higher scores. I always give clients the option so they can see the lower rates and payments and allow them to make an informed decision. In this case the client understood that paying $12K to save $135 a month was not worth it.

I ask you, is it better to get good advice or a lower payment?

Condo / Townhome issues we know of now:

1. American Beauty Village – Insurance
2. Scenic Hills – Insurance
3. Mariposa – Litigation – Agreed upon, but not yet recorded
4. Bouquet Canyon Village – Insurance
5. Madison – Litigation
6. West Creek / West Hills – Insurance
7. Cornerstone – Insurance
8. Canyon Oaks – Insurance
9. Brookside Walk – Insurance – NEW as of last week
10. Shadow Ridge – Oak Park – Insurance
11. Cabrini Villas – Burbank – Insurance
12. Sierra Glen Condos – Insurance (thanks Danielle)

Please let me know if you hear anything new on condos or townhouses. We will see premiums increasing, likely increasing the HOA Fees soon!

Interest rates are higher today, as the bond auction is not going well! We have gained a lot in the past couple of weeks, and let’s hope we don’t go on a losing streak again!

• 12-day escrows if your buyer is pre-approved - Conventional / FHA / Jumbo / Bridge
• We do loans in all states, so call me with anything you need.  
• Government Loans (FHA / VA) are in the mid to high 6’s
• Conventional Loans up to $726,200.00 are in the 7’s
• High Balance Loans $726,201.00-$ 1,089,300.00 are in the 8’s
• Jumbo loans above $1,089,300 are in the 7’s and 8’s
• Bank statement loans - They are available with 10% down again! 8’s and 9’s depending on down and credit score.
• No income qualifier – 40% down with reserves! In the 7’s!
• 0 down loans are in the high 7’s – 660 credit score min right now, up to $740,000.00.
• Private Money lenders - hard Money Loans – 35% down!
• No Ratio Loans 30% down
• Debt Service Coverage loans with as little as 25% down
• Bridge Loans - are typically 8.49% with limited fees – But they get you where you need to go!
• 0 down California Dream for all Equity Share – Postponed until February???
• 3/2/1 Buydowns 2/1 Buydowns and 1/0 Buydowns are available at great start rates!

Interest rates are subject to change without notice! Above are LA County Loan Limits.

I am available all weekend if you have any questions or if someone is interested in buying a property! My cell is 661-714-6258, and my office line is 661-260-2970 ext. 2222. Please text me at 661-714-6258 or email me at Mike@AugustaFinancial.com. Have a great day and a better tomorrow! Please call me when you have a client that needs to borrow!