Ask OurBroker: Are FHA Mortgages A Rip-Off?

Are FHA Loans a Rip-Off -- OurBroker.comQuestion: FHA mortgages are government loans. I thought the government was going to help the home buyer and home owners out there to make affordable monthly payments? What’s up with the MIP? This is absolutely a big rip off for the buyer and homeowners.

Answer: The FHA program has been around for a long time and as a result it naturally raises various questions. Let’s respond to your points:

FHA mortgages are government loans. The FHA program began in the 1930s and has been used roughly 40 million times since, often by first-time buyers. However, it’s not a “loan program” because the financing actually comes from the private sector. The FHA program is really a form of mortgage insurance.

Are FHA Mortgages A Rip-Off?

What do borrowers get in exchange for paying insurance premiums? Three benefits: First, they can purchase with 3.5 percent down instead of the 20 percent lenders want without insurance. Second, in the event of foreclosure the FHA pays off the lender. Third, to be backed by the FHA a loan must meet certain standards meaning no prepayment fees or gotcha’ clauses.

I thought the government was going to help the home buyer and home owners out there to make affordable monthly payments?

In January 2015 the annual mortgage insurance premium (annual MIP) for most FHA borrowers was lowered from 1.35 percent to .85 percent, a .50 percent decrease. The 1.75 percent up-front mortgage insurance premium (up-front MIP) continues.

The annual MIP reduction is essentially the same thing as reducing the interest rate by half a percent. The result was a huge surge in the demand for FHA-backed loans.

What’s up with MIP? The MIP funds collected from borrowers are placed in a reserve account and used to pay off lender claims. Premium levels have been high in recent years because the FHA had massive losses associated with loans insured between 2000 and 2009. In the past few years the program has been profitable, the reserve account has been bulked up and so it has become possible to lower the annual MIP. In 2015 the FHA added $19 billion to its reserves and the reserves now have a capital ratio which is higher than the 2 percent required by Congress.

Also, the FHA has a Streamline program which allows borrowers to cheaply refinance. Basically, your current FHA loan must be outstanding 210 days and you must have a good payment history. There is typically no appraisal, income verification or credit review. Speak with lenders for specifics.

This is absolutely a big rip off for the buyer and homeowners. FHA insurance is one of several low-downpayment options available to mortgage borrowers. If you don’t like the FHA program — and if you don’t have 20 percent down —  then consider loans backed with private mortgage insurance (PMI), VA financing for qualified borrowers, or loans which lenders self-insure — you pay a higher interest rate but there are no insurance premiums. To see which is best in your situation look at the monthly costs and up-front fees associated with each loan alternative.

But is the FHA a rip-off? Not hardly. If the FHA program did not exist the housing crisis would have been far worse.

“Private lenders exited the market when the crisis hit,” said Scott Olson, in a recent article for the American Banker. Olson, executive director of the Community Home Lenders Association (CHLA), noted that “Fannie and Freddie pulled back as they entered conservatorship. Thankfully FHA filled the void, at one point financing as much as 50 percent of all new home purchases. Without FHA, housing prices would have cratered — and losses on existing FHA and GSE loans would have increased by tens or hundreds of billions of dollars more. Taxpayers would have paid the price.”


Syndicated originally to newspapers nationwide by Content That Works. Revised, modified, expanded and updated. Posted with permission.

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