If you went to get a mortgage four years ago, you would have been bombarded with options. Do you want zero down? An 80/20? Perhaps a Low Doc, or No Doc, or negative amortization loan? Whatever your fancy, it was there.

Today times have changed and your options are limited. There are three basic loan programs left: Conventional, FHA, and VA. The VA loan is great, but you must be a veteran in order to get one. So, if you don’t fit that bill, then you’re left with only two choices. How do you know what is best? Which provides you, the borrower, with the most security and affordability? And which will still lend to you in today’s climate? The answer is easy; look no further than the Federal Government!

The FHA has been lending money since 1934, and is still the largest insurer of government mortgages in the world, making it your number one source of financing for a home loan.  Here are my top 10 reasons why:

10. FHA loans have more competitive interest rates than the competition.

9. Your debt-to-income (DTI) ratios are more flexible on an FHA loan.  Conventionally, you are required to keep your housing expense at or near 28%, however, the FHA will allow 31%. Your total expense ratio (your housing expense and all other debts) on a conventional loan must be around 36%, whereas FHA will allow 43%.

8. There is no financial reserve requirement on FHA loans.

7. You can make a 3.5% down payment in comparison to 5% or 10% down, depending on the market, with conventional loans.

6. Your entire down payment can come as a gift from a relative, employer, or even an organization.  Conventional loans require that your minimum down payment comes from your own funds and is sourced for 2 months.

5. There are greater protection requirements against foreclosures, and lower penalties and late fees, should you be late on your payment.

4. FHA is federally insured and allows for an assumption of your mortgage by an interested party.

3. FHA consists of a variety of programs offering both fixed and adjustable rate mortgages.  The ARMS available from the FHA offer more security for the borrower and less fluctuation in rates during the adjustment periods. An ARM can also be rolled into a fixed rate mortgage without having to re-qualify or have a new appraisal.

2. A non-occupant co-borrower is allowed to cosign on the loan to help buyers who may not qualify on their own. No other loan program today allows this option.

1. The streamline refinance option. When you get an FHA mortgage, you automatically receive an entitlement for a streamline refinance, which allows you to refinance without having to re-qualify or even have an appraisal completed.  This is especially beneficial in times like these, where appraised values are low and you may not have the required equity to refinance.  More consumers today are able to take advantage of current low rates because they originally took out an FHA mortgage.

As lending guidelines become tighter for conventional financing, many borrowers are turning to what, until recently, was a very underused but phenomenal program, FHA financing. Established in 1934, the FHA has insured over 34 million properties since its birth. It is very highly regulated and one of the most secure forms of financing available to both lenders and borrowers.

There are many benefits and entitlements that FHA borrowers receive. I have listed below a few of my favorites.

Low Down Payment
One of the most popular and well-known features of an FHA mortgage is that it only requires a down payment of 3.5%, as opposed to the 5-20% necessary for conventional programs. FHA allows you to keep more money in your pocket! And trust me, once you move into your new home, you’ll find that you need it for things like paint, furniture, and even new light bulbs.

Manual Underwriting
With conventional mortgages, your fate is decided by a computer. It’s either yes or no, and these days ‘no’ is more prevalent than ever. With FHA, even if the computer says no, a licensed underwriter can ask for additional materials, like a letter of explanation to provide a reason for their concerns. This can be very beneficial if certain issues—like debt-to-income ratios that are slightly high, blemishes on your credit, or little money available in the bank for fallback reserves—are holding you back.

Upfront Private Mortgage Insurance (UFPMI)
Private Mortgage Insurance is a huge benefit when it comes to FHA loans. Unlike conventional mortgages, where the monthly charges can be hundreds of dollars, FHA allows you to roll in the PMI while paying a very low monthly premium, and also will refund portions back to you when you refinance or move.

Assumable
Thinking of moving? FHA is currently the only loan in the market that is assumable. This means that when you sell your home, you can sell your mortgage with it. This can be a huge benefit to folks who lock in low rates, then sell when rates are higher. Imagine, you and your neighbor are both selling your homes. You offer a buyer the option to take over your mortgage at a 5% fixed rate, and current rates are at 7%. Your neighbor is without an assumable mortgage and can offer nothing better than that 7%, giving you a major advantage.

Efficiency Loans
Another great thing about FHA loans is that they allow you to roll in the cost of energy efficient home improvements into your mortgage. Not only do you save money on the mortgage, you also reduce your monthly utilities and add value to your home. Talk about wonderful!

203K
FHA will give you money to repair a foreclosed home that does not meet appraisal requirements for lending. This program can offer you up to $35000 to use with an approved contractor to make the repairs necessary in getting the house to the point it can be financed.

Streamline
Whenever the market moves in your favor, you can streamline refinance into a more cost effective loan with no need for income, credit or asset checks. Often, you can even complete your streamline refinance without a new appraisal.

ARM Protections
FHA-backed ARMs are some of the most amazing products currently on the market. If you will be in your home for less than ten years you need to consider them. (for more information read my previous post)

To learn more about FHA and your options contact a mortgage expert to discuss your options and benefits right away!

In the past two years, when it comes to finance, the word ARM has become the dirtiest three-letter word around. Horror stories saturate the media still, and unfortunately don’t paint an accurate picture what a great product this loan can be for many families.

What most people don’t realize is that the ARMs you read about or see on TV are not the same as the ARMs that most Americans have ever been in, let alone even close to the ARMs that are available today. Allow me to break down the truth behind the ARMs that are being portrayed in the media.

2/28 ARM - This loan is what is known to the public as a Subprime mortgage. Subprime loans were not all bad. They actually gave a lot of families the opportunity to change their spending habits, restore their credit, and offered the chance to refinance later into a loan that made more sense financially for them. It was a perfect program, giving the borrower two full years to get their act together. Often borrowers would save $600-$1500 a month when they consolidated their other debts. The problem was that no one showed them what to do with their savings, and within a year many borrowers had racked up more debts and never repaired their credit before the adjustment. Banks forgot that the subprime borrower didn’t really understand money management.

Option ARM - This loan was designed for people who were investors looking to own a property for a very short period of time. It allowed the borrower to pay 1% and roll the other 7% of the rate to the back-end of the mortgage. A borrower could do this until the balance reached 125% of the original loan amount, which usually took about three to five years. This was called the Recast Period and it required that you make full principal and interest payments. Now, that it wasn’t required to pay just the 1%, any borrower could have made the full interest payment, 15-year payment, or a 30-year payment and have no recast occur. Many people thought they would just refinance at that recast period into another Option ARM and keep paying 1%, but their housing values began to change and procrastination to move out of those ARMs got most of those folks in the end.

I’ll admit that there were many people who abused these loans on both consumer and industry sides. But truth be told, it’s really poor decision making on what they did once they had the loans that really dictated the outcome of these borrowers’ financial future more often than it is a duping by the original lender. I always say the human condition is procrastination, and in my six years in this industry, I can’t count the amount of times borrowers in both of the loans told me they just wanted to wait because “they still had a year,” instead of saving money and moving into a more stable ARM or a fixed-rate loan. A more stable ARM? They exist, you ask? Why Yes they do! On both the conventional and the FHA side. Right now the FHA 3/1 ARM is the most perfect product on the market. I’ll explain how it works.

FHA 3/1 ARM - The loan is locked in for three years and then can only adjust either up or down no more than 1% per year, with a maximum of 5% over a lifetime. Here’s a payment example on a $150K loan amount over a 8-year period at worst-case scenario: At press time the interest rate is 3.75%, so that’s the starting rate I’ll use, and I’ll compare it to a 30 years fixed at 5.5%.

The two comparisons show the balance of the loan at the end of each year, and then the monthly payment for the next twelve months.

30-Year Fixed-Rate

$148,000 Loan Amount, 5.5% interest rate, $1040 PI (taxes and insurance of about $2400 a year, or $200 a month, included)

(total principal at the end of year, payment at the end of the year)

Year 1: $146,006 principal, $1051 payment
Year 2: $143,900 principal, $1051 payment
Year 3: $141,675 principal, $1051 payment
Year 4: $139,324 principal, $1051 payment
Year 5: $136,841 principal, $1051 payment
Year 6: $134,218 principal, $1051 payment
Year 7: $131,447 principal, $1051 payment
Year 8: $128,520 principal, $1051 payment

Total Payments: $100,960 over eight years
Average Interest Rate: 5.5% (it never changes)

3/1 FHA ARM

$150K Loan Amount, 3.75% starting interest rate (taxes and insurance of about $2400 a year, or $200 a month, included)

(total principal at the end of year, payment at the end of the year)

Starting Fixed Period:
Year 1: $147,241 principal, $894 payment
Year 2: $144,378 principal, $894 payment
Year 3: $141,405 principal, $894 payment

Loan is Recalculated to 27 year term and then 26, 25, etc. for each remaining year.

Year 4: $138,761 principal, at 4.75% interest rate, $975 payment
Year 5: $136,550 principal, at 5.75% interest rate, $1044 payment
Year 6: $134,208 principal, at 6.75% interest rate, $1127 payment
Year 7: $132,074 principal, at 7.75% interest rate, $1211 payment
Year 8: $130,104 principal, at 8.75% interest rate, $1311 payment

Total Payments: $100,200 over eight years
Average Interest Rate: 5.63% (add up interest rates and divide by years)

Notice it takes the first six years to get your payment to match the 30-year payment today.

Same payment totals at a worst case scenario! Chances are you’ll save a lot more. In the first three years it’s a definite cash-in-your-pocket savings of $5600. Historically speaking, the adjustment will most likely never go over 5.875%, based on the last 35 years of how the market has moved. So you’ll really save a ton. Also, its an FHA loan, so you’ll have all the entitlements of FHA, which you can read about in my next article.

Don’t let the media’s portrayal of the ARM misguide you! These are great loans, and any industry insider who has been in the business for a considerable period of time would agree. In fact, most people in the know of the mortgage business have this loan on their homes. Call and speak with your mortgage expert about this great program and start saving money with this very savvy program.