As a full time Boise real estate agent over the past six years, I can attest that finding the right home is a picnic compared to getting your loan approved. Without question, my clients have shed more tears and I've pulled out a lot more hair over loan issues than real estate issues.
I started selling Boise real estate in 2005. At that time, most homebuyers were getting conventional 80/20 loans (80% 1st and 20% second). Nothing down and no mortgage insurance. Many homebuyers were getting what is now being referred to as subprime loans. For my first year and a half as a real estate agent, I didn't do any FHA loans. (In fact I didn't even know what one was.)
In 2006 that changed in a hurry. Loans became increasingly hard to get and lending requirements got progressively restrictive over the next four years. Over that time period, the real estate market turned to FHA financing. FHA loans only require 3.5% down (vs. 5% down for conventional) and for the past several years have featured lower interest rates than conventional loans. In fact, every single homebuyer I represented picked FHA financing over a conventional loan.
There was no reason to choose a conventional loan. FHA has lower credit score requirements (currently 580 vs. 620), requires less time out of a short sale or foreclosure (2 years vs. 5) and features better interest rates (currently 4.32% vs. 4.75%). You retain more of your own money (3.5% down vs. 5%) and by 2007 most lenders were FHA registered.
Today I had my first client choose a conventional loan in over four years. This may indicate the beginning of a change in consumer sentiment.
As indicated above, although FHA's interest rate is lower, the required mortgage insurance is twice the price. As a result, my client's total monthly payment is higher through FHA. In addition, FHA won't let you drop mortgage insurance until at least five years have passed.
Even at the five year mark, my client would have to actually pay down 20% of the loan before being eligible to drop mortgage insurance payments instead of simply having 20% equity due to real estate appreciation. Conversely, a conventional loan requires only an appraisal. If the value of the home vs. the loan balance indicates she has 20% equity in the home, she'll be able to drop her mortgage insurance. Through FHA financing, at the five year mark she'll only be able to drop her MI payments if she has reduced her principle on the loan by at least 20% (regardless of the appraised value).
So what's the bottom line? More Boise home buyers (at least the ones I'm working with) will be taking a good look at conventional financing again. Increases in FHA mortgage insurance offset the lower interest rates. In addition, time restrictions and the way home equity is calculated both favor conventional loans.
I started selling Boise real estate in 2005. At that time, most homebuyers were getting conventional 80/20 loans (80% 1st and 20% second). Nothing down and no mortgage insurance. Many homebuyers were getting what is now being referred to as subprime loans. For my first year and a half as a real estate agent, I didn't do any FHA loans. (In fact I didn't even know what one was.)
In 2006 that changed in a hurry. Loans became increasingly hard to get and lending requirements got progressively restrictive over the next four years. Over that time period, the real estate market turned to FHA financing. FHA loans only require 3.5% down (vs. 5% down for conventional) and for the past several years have featured lower interest rates than conventional loans. In fact, every single homebuyer I represented picked FHA financing over a conventional loan.
There was no reason to choose a conventional loan. FHA has lower credit score requirements (currently 580 vs. 620), requires less time out of a short sale or foreclosure (2 years vs. 5) and features better interest rates (currently 4.32% vs. 4.75%). You retain more of your own money (3.5% down vs. 5%) and by 2007 most lenders were FHA registered.
Today I had my first client choose a conventional loan in over four years. This may indicate the beginning of a change in consumer sentiment.
As indicated above, although FHA's interest rate is lower, the required mortgage insurance is twice the price. As a result, my client's total monthly payment is higher through FHA. In addition, FHA won't let you drop mortgage insurance until at least five years have passed.
Even at the five year mark, my client would have to actually pay down 20% of the loan before being eligible to drop mortgage insurance payments instead of simply having 20% equity due to real estate appreciation. Conversely, a conventional loan requires only an appraisal. If the value of the home vs. the loan balance indicates she has 20% equity in the home, she'll be able to drop her mortgage insurance. Through FHA financing, at the five year mark she'll only be able to drop her MI payments if she has reduced her principle on the loan by at least 20% (regardless of the appraised value).
So what's the bottom line? More Boise home buyers (at least the ones I'm working with) will be taking a good look at conventional financing again. Increases in FHA mortgage insurance offset the lower interest rates. In addition, time restrictions and the way home equity is calculated both favor conventional loans.
About the Author:
Todd McCauley is an owner/agent of Eagle Rock Properties, specializing with homes in Boise Idaho. He manages a program called The HELP Program that designed to help struggling buyers qualify for a mortgage. He helps buyers and sellers with Boise homes.
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