Myth Buster: FHA Loans are for People with Bad Credit

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All right so today we’re going to be busting up the biggest myth in the real estate industry and that’s the myth and misconception that fha loans are designed for people with bad credit okay nothing could be further from the truth and today we’re going to crush this myth with nothing but facts and real world examples let’s get started so the first thing we need

To do is to kind of clear our heads of all the misconceptions that may be sitting around in here and just to understand that mortgage programs such as fha or conventional are nothing more than tools in a tool belt to help to get you the best financing that meets your lifestyle okay say for instance you want to take this nail and you want to hammer it into a

Wall so what are you going to use to do that are you going to use a screwdriver or are you going to use a hammer obviously hammer is the right answer right so with that said to get started we’re going to take a closer look at the pros and cons of fha financing versus conventional financing key point number one down payment minimum so for fha it’s always three

And a half percent with conventional it’s five percent but if you’re a first time home buyer uh you can do it with as little as three percent now your minimum down payment to avoid pmi or mip uh that does not apply for fha doesn’t matter how much money you put down uh you will always have some sort of mortgage insurance now for conventional you can avoid pmi

By putting down twenty percent okay so for the third point it’s the mortgage insurance so for fha loans we call it mortgage insurance premium or mip and if it’s a conventional loan we call it pmi or private mortgage insurance so for fha it’s uniform rates everybody gets the same rate regardless of your credit score as long as you qualify for the loan and it

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Could be a little bit lower if you put down five percent or more but not much on the conventional loan it’s what they call risk-based pricing when they say risk-based it’s very sensitive to many factors including your credit score the size of your down payment your debt-to-income ratio the number of applicants on the application and several other factors again

With the mortgage insurance uh we like to talk about the possibility of cancellation over time with an fha loan that is not a possibility unless you put down 10 or more and then you still have to keep it for 11 years otherwise if you put down less than 10 percent then it is on the loan for the life of the loan so you either have to refinance that loan or sell

Your home in order to get rid of that premium now for conventional it is cancelable over time once the homeowner achieves a 22 ownership interest in the property that can happen in one of three ways number one you can pay down the balance of the loan you can watch your property increase in value over time or a combination of the other two now let’s take a look

At qualification your debt to income ratio maximum for an fha loan that goes all the way up to 57 57 that is of the calculated income on your application now on conventional loans you can go up to 47.49 and maybe right up right up to 50 percent uh depending upon your overall financial profile next up is the maximum loan size for most areas in florida fha loans

Will grant up to a loan size of 331 760 and you can go up to 548 250 so if you’re looking for a bigger size house like in the 400s or 500s and you don’t quite have a 20 or 30 payment then conventional is probably your best bet there eligible property types they’re almost all the same you can do a single-family home or townhome built with relative ease on either

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Of these it gets a little dicey when it comes to condominiums if you’re trying to do fha financing with condominiums it’s much easier to qualify with with conventional financing now if you’re looking to get a multi-family you can do either but your down payment requirement it’s going to be a lot less with an fha loan and finally the minimum scores for approval to

Get an aus or an automated underwriting approval which is the gold standard for mortgage approval you can do either with a 620. so again this just kind of kills that myth even further that you would need fha if you had a poor credit score because that’s obviously not the case okay so now that we’ve looked at the differences let’s take a look at a couple of real

World examples for the first two examples we’re going to be looking at a 300 000 purchase price in the state of florida with a single family home and it’s an experienced home buyer in example one the buyer has a 670 middle fico score so let’s see how the numbers play out so the minimum down payment for fha is three and a half percent or ten thousand five hundred

Dollars in this example switching over to conventional it’s a five percent down payment or a fifteen thousand dollar down payment so you can see the down payment requirements already lower for fha let’s look at the interest rate big difference here being that it’s a government insured loan the interest rate is significantly less it’s like one percent less in this

Particular example and let’s see how it plays out in the monthly payments 11 25 versus 12 40. now look at the mortgage insurance the mortgage insurance with fha is not so sensitive to that credit score they’re kind of getting almost like one size fits all pricing right so the mortgage insurance is only 202 versus 307 that’s over a hundred dollars or more for

Conventional simply because of the credit score so all in all the fha loan saves the applicant 218 dollars per month let’s look at example two everything’s the same except the credit score is a 740 instead of a 670 okay let’s see how these numbers play out as you can see really nothing changed with the fha scenario but let’s switch over to conventional now still

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Your down payment requirement five percent or fifteen thousand is significantly lower versus the last scenario for conventional but it’s still not quite as low as fha but the monthly payment isn’t too much different right it’s actually just a little bit higher than the fha but now look at the mortgage insurance instead of 202 it’s only 137 so that’s a pretty big

Shift when you compare the two conventional is the clear winner here okay it’s it’s saving about 28 a month but more importantly down the road that mortgage insurance component that 137 will eventually drop off the conventional loan but it will not drop off the fha loan so again if i were your loan originator this was the scenario i would be advising conventional

Every time all right so myth busted right fha financing is not designed for people with bad credit far from it i think you’d agree right it’s just simply one of a few options that may or may not be the best choice for you so be sure to share your goals and your lifestyle with your loan originator so that we can help you determine which particular program is

Going to be the best fit for you that we can show you examples possibly in both ways and then you make the right decision hope you enjoyed this video be sure to give it a like and a thumbs up if you have a second be sure to share it and of course if you’re looking to purchase or refinance anywhere in the state of florida we’d love to help i’m derek bisson this is

Unconventional lending thanks and take care you

Transcribed from video
Myth Buster: "FHA Loans are for People with Bad Credit" By Derek Bissen