In Missouri, FHA loans are actively becoming the most popular loan due to restrictive credit standards. There is a national increase in FHA lending but our area of expertise lies within our licensed state of MO.
An FHA loan still offers the borrower a low down payment. Underwriting is not as constrained as conventional lending, and current FHA rates are lower for a borrower with below average credit scores.
There is one issue that is becoming a problem in the conventional lending world. That issue is mortgage insurance. This has no affect FHA lending.
When you are approved for an FHA loan, your mortgage insurance is also approved. This is not the case with a conventional loan. If your down payment or equity is less than 20%, the lender must obtain private mortgage insurance. This mortgage insurance, or PMI, is secured through a separate company. The mortgage insurance company may deny your coverage even after a lender approves your mortgage. In a case such as this, your approval will be canceled, and your mortgage will be denied.
Why would a mortgage insurance company deny coverage on an approved loan? Their underwriting standards are different from the lenders. Most mortgage insurance companies are experiencing severe financial burdens due to foreclosures and defaults.
To understand this concept you must know what mortgage insurance is. This insurance allows lenders to accept a loan with less than a 20% equity stake. The insurer will guarantee the lender against loss in the event of a foreclosure. It is common knowledge that we are experiencing near record borrower defaults and foreclosures. Lenders are taking heavy losses. Some of these losses are being claimed against the mortgage insurance. There are private mortgage insurance companies for on the verge of collapse because of these insurance claims. FHA’s mortgage insurance differs because it is government sponsored and not held privately.
Another difference between FHA and conventional mortgages is in the way they are sponsored and packaged into mortgage backed securities (MBS). Federal Housing Administration or FHA loans are government backed. FHA is a division of the United States Department of Housing and Urban Development (HUD).
Conventional loans are packaged into mortgage backed securities by Fannie Mae, Freddie Mac, and privately held companies. Fannie Mae and Freddie Mac operate under a government charter, but they have shareholders and are really private sector companies. They are known as GSE’s, or government sponsored enterprises. They were created by Congress to enhance the flow of credit by allowing banks to easily sell their mortgages. The banks receive immediate capital in return. Fannie Mae and Freddie Mac are both virtually bankrupt today.
FHA loans also allow for higher debt to income ratios. A debt to income ratio is calculated by dividing your monthly debt by your monthly gross income. Conventional loans have reduced this ratio to lower the risk of borrower defaults. FHA is still using the same common sense underwriting standards that have made it one of the only solvent lending entities during this economic downturn.
FHA loans are currently the most viable option for the prospective homeowner. If you are a first time home buyer, or moving up, this is definitely an option you should explore. Please take a moment to fill out our quick online application or feel free to give one of our Mortgage Consultants a call if you think this is the right loan for you.