FHA Loans, are they worth it?

1 Reply

Hi BP,

I ran across an article on FHA 3% down loans and some of the information had me second guessing them as a viable option for financing. This part in particular:

The cost of getting an FHA loan

FHA borrowers are charged an annual mortgage insurance premium of up to 1.35 percent of the average outstanding balances of their loans. The fee is added to the borrower's monthly mortgage payment. The FHA also charges a 1.75 percent upfront fee when the borrower gets the loan.

A borrower getting a $200,000 loan, after making a 3.5 percent down payment, pays $225 per month in FHA mortgage insurance, plus an upfront fee of $3,500. Say you keep that mortgage for 10 years before you sell or refinance -- that adds up to about $30,000 in mortgage insurance fees.

That's substantially more than what a borrower would pay for private mortgage insurance on a conventional loan, which doesn't have an upfront fee. The mortgage insurance premium on a conventional mortgage can be less than half of FHA's insurance, depending on the borrower's credit, according to estimates from mortgage insurance company United Guaranty.

"A conventional loan generally is less expensive for borrowers in almost all cases," says Brian Gould, chief operating officer for United Guaranty, a mortgage insurer.

Read more: http://www.bankrate.com/finance/mortgages/homebuyers-get-fha-loans.aspx#ixzz32XuMtgy3

What are your thoughts on this?

Robert - you're right. They are expensive and best avoided if possible.

When I started I used some FHA financing and while it was still expensive, it wasn't nearly as expensive as it is today... and you were able to appraise out of your PMI which is no longer the case.

So - I wouldn't write it off altogether if the right deal came along and you were planning an exit... but it's not ideal.

An angle might be to get the 'right deal' under contract assuming FHA financing as the last resort / contingency in your contract while you pursue some of the more creative financing options on the site here. If those all fell thru you'd still have the FHA as a backstop to get the deal done.

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