Re: Evaluating Convention
al vs. FHA
07-20-2010 12:46 PM
Also wanted to point out that VA & USDA, when available, are almost always a better option as there isn't any monthly mortgage insurance on either.
VA has a funding fee (similar to the upfront mortgage insurance premium that FHA has), first time use and less than 5% down is 2.15%, 5-9.99% down is a 1.5% funding fee, and 10% or more down is just a 1.25% funding fee. Subsequent use, no matter the LTV, is 3.3%. For a VA IRRRL (Interest Rate Reduction Rollover Loan) it's .5%, this is similar to an FHA streamline where it's easier qualifying in theory, however we are seeing some lenders add overlay guidelines. Reservists pay .25% more in funding fee's except for subsequent use & IRRRL's. Veteran's who had a service connected disability and also have a certain amount of disability rating can be exempt from having to pay any funding fees, and are often eligible for discounts/exemptions on property taxes as well.
VA is a good option when available and when putting less than 15% down. With 15% down or more, and FICO scores of 660 or higher, conventional starts gaining an advantage over VA since the mortgage insurance won't be much on conventional vs. the VA funding fee, and at 20% down conventional is almost always the better bet.
USDA Rural Development (RD) has two versions, a "Direct" program which is available to people who fall within the "low income" eligibility limits and the mortgage application is made directly to USDA, and the "Guaranteed" version which is available to people who fall within the "moderate income" eligibility limits. The properties also have to be in an eligible area. With the Guaranteed version, USDA charges a 3.5% guarantee fee (similar to FHA's upfront mortgage insurance & VA's funding fee) on purchases and 2.25% on refinances of existing USDA mortgages, currently these 3.5%/2.25% figures are what USDA is currently using even though they technically aren't official yet (this is what HR 4899 will put in place). Both the income limits & eligible areas can be found at http://eligibility.sc.egov.usda.gov/eligibility/we
The USDA RD mortgage is a "loan of last resort", meaning if you can't qualify for FHA or conventional they then want you to try USDA. The reason they say this may be for many reasons, but the primary reason I believe is that USDA's funds are limited so if everyone used USDA vs. FHA or conventional then the people who truly need USDA or couldn't buy a home wouldn't have the option unless the fiscal year starts over. They don't require you furnish an FHA or conventional loan denial in order to obtain USDA RD financing, but from what I've seen it just really means if you have 20% to put down then they are going to question why the use of USDA and most likely will decline. USDA RD's advantages/disadvantages vs. conventional & FHA financing are the same as VA's.