What is FHA and how does it work? // Top 1% Loan Officer Explains

Join Jeff Smith, a renowned Top 1% Loan Officer, as he guides you through the intricacies of FHA Loans in this comprehensive podcast. Discover the true versatility of the Federal Housing Administration (FHA) Loan process, made simple for everyone.

🔍 In This Episode, You'll Learn About:

What is an FHA Loan?
- An easy-to-understand breakdown of FHA loans, their benefits, and unique advantages.

Common Misconceptions: Not Just for First-Time Homebuyers
- Jeff debunks the popular myth that FHA loans are exclusively for first-time buyers, expanding on how they can be a smart choice for many different homeowners.

Who Qualifies for FHA Loans?
- Find out the criteria and see if you're eligible!

FHA Loans vs. Conventional Loans
- A comparative analysis to help you decide which loan type suits your needs.

The FHA Loan Application Process
- A detailed guide through the application process, step by step.

Pro Tips for a Smooth FHA Loan Journey
- Insider advice for navigating the FHA loan process effectively.

📚 Why This Episode Is a Must-Listen:

Expert Insights: Leverage the expertise of Jeff Smith, a top authority in the loan industry.

Clarifying Myths: Gain clarity on common misunderstandings about FHA loans.

Demystifying Home Buying: Whether you’re a seasoned homeowner or a potential first-time buyer, this episode is your key to understanding FHA loans.

Stay Updated: Get the most recent updates and requirements for FHA loans.

Important Links & Info:
Follow Jeff:
Instagram: https://www.instagram.com/jeffsmithaz/
Facebook: https://www.facebook.com/profile.php?id=100002927397116
LinkedIn: https://www.linkedin.com/in/jeff-smith-40627016/

Jeff Smith - Tiger Home Loans
📲 480.909.4000
📩 [e-mail]
🔗 www.tigerhomeloans.com
Equal Housing Opportunity
Tiger Home Loans NMLS: 2425582 NMLS: 413643

Episode Transcript

Speaker 1 (00:00):
FHA mortgage.
What is it?
That's a confusing term, butone that we hear a lot.
I'm going to break it down foryou in this video.
Give you everything you need toknow.
Welcome to the show.
Fairways and Finance.
My name is Jeff Smith.
I've been in the mortgagebusiness for 16 years top

(00:20):
quarter percent LO nationwideand you know this podcast.
We want to talk about yourfinances, how to grow and
accumulate wealth and all thingsrelated to the mortgage
industry.
But we're golf lovers here aswell, so we're going to work in
some golf.
Don't worry for my golf loversout there.
We got you and I hope you enjoythe show.
So FHA a lot of times peoplewant to somehow work that into a

(00:44):
first time home buyer something.
Fha stands for Federal HousingAdministration, so the Federal
Housing Administration is adivision of the government.
They're part of the Housing andUrban Development Office, hud,
and they have a mortgage programwhere they ensure mortgage
loans.
So they have this specialmortgage program that has

(01:07):
special set of criteria with thegoal of increasing home
ownership across the US.
So because FHA has F and Hfirst time home buyers, first
couple letters, a lot of timespeople think that FHA loans are
for first time home buyers only,and they're not you can be a
repeat buyer using an FHAmortgage.

(01:28):
Now the trick with FHA is youcannot have more than one FHA
mortgage at a time, with theexception of a few special
criteria, one of which being anincrease in family size or if
you were to move outside of themarket area of where the home is
that you currently have an FHAmortgage.

(01:49):
So there's a few moreprovisions, but those are the
most common that we run across.
Now FHA the biggest benefits tothat program is a lower down
payment and better interestrates.
So let's talk about downpayment.
The minimum down payment on FHAis three and a half percent of
the purchase price.

(02:09):
So on a conventional mortgage,if you've owned a home in the
last three years, you have toput at least 5% down.
With a conventional mortgage,if you're a first time home
buyer which is defined as nothaving owned a home in the last
three years you can put aslittle as 3% down.
So FHA for a repeat buyer is alittle bit less down.

(02:31):
Now where FHA starts to getreally good is comparing it to
conventional.
When you put three and a halfpercent down, you still get the
best rates when you put 3% downon a conventional loan as a
first time home buyer, you'repaying a higher interest rate,
so there's a pricing premium forthat, unless you are a low to
moderate income earner.

(02:51):
Fha is more lenient when itcomes to credit score, so FHA
interest rates are alreadyslightly lower than conventional
.
But where FHA really shines isthat the interest rate is the
same if your credit score is notperfect.

(03:11):
So in a lot of cases, as longas your credit score is 660 or
640 or higher, you're going toqualify for the best rates with
a lot of different lenders outthere.
So FHA, from a credit scoreperspective, is very forgiving.
When we think of a conventionalmortgage, if your credit score
starts to dip below 740, youcould still qualify, but the

(03:35):
rate that you pay is going to besignificantly higher.
So FHA is great for someonewho's had some derogatory credit
history and doesn't have aperfect credit score.
The minimum down payment on anFHA to make a 3.5% down payment
is 580 or higher.
If you put 10% down or more,you could potentially qualify

(03:56):
with a credit score less than580.
Although those cases are prettylimited.
But to get the best rates onFHA we want to make sure you've
got a credit score in that 640to 660 range or higher,
depending on the lender.
So FHA, more flexible when itcomes to the interest rate based
on credit score, already hasreally good rates for people

(04:19):
with any credit score.
And then you have what's calledprivate mortgage insurance.
So private mortgage insuranceis paid on all FHA loans for the
life of the loan.
Private mortgage insurance ispaid on conventional loans when
you make a less than 20% downpayment and you have to pay it
Until you've paid the loan downto 20% equity based on the

(04:41):
original purchase price.
Okay, so private mortgageinsurance for FHA is a flat 0.55
percent per year on a 30-yearfixed rate.
Fha mortgage at three and ahalf percent down Conventional,
when you're thinking in terms ofa 3% down payment could be
anywhere from 0.6 to 1.5% of thepurchase price per year.

(05:07):
So PMI on an FHA loan,especially if your credit score
is less than 740, is less thanit is on a conventional mortgage
.
So you get a lower rate, youget lower costs for PMI.
So those are two huge benefitsof the FHA.
So the FHA buyers that wetypically see are those you know
a lot of times it's not badcredit, it's just not stellar

(05:31):
credit.
If you have less than stellarcredit, there's a lot of
situations where FHA could be agood option for you.
But with that PMI you know thecaveat there is that it's a life
of loan coverage.
So the only way to get out ofPMI on FHA is to refinance.
Once you have 20% equityrefinance into a conventional
mortgage.
You cannot drop it on an FHAmortgage.

(05:53):
Okay, but we would look at theblended rate, including the PMI.
So, like there's folks that Idid FHA loans for during COVID
when the rates were sub 3%, sothey might have 2.75% on an FHA
loan.
You factor in the PMI, it'sequivalent to a rate of around
3.5% with no PMI.

(06:15):
So unless they could refinanceto a conventional loan for less
than 3.5%, they're better offcontinuing to pay the PMI
because that overall cost islower than you know what the
rate would be without PMI today,if that makes sense.
So FHA, there are loan limits.
You cannot finance an unlimitedamount on an FHA loan.

(06:38):
The base standard base loanlimit for FHA for 2024 is
$498,257.
So you cannot finance more than$498,257 unless you live in a
county that is a higher costcounty where you have higher FHA
loan limits.
So two markets where I do a lotof business Phoenix, arizona,

(07:03):
the Phoenix Maricopa County areaFHA limit $530,150.
And then the Nashville Metroarea FHA loan limit $943,000.
So there are varying loanlimits based on county.
Fha has a calculation that'sbased on the median sales price

(07:23):
and it's based on the conformingloan limit, which is also based
on the median sales price percounty.
So we're going to seevariations of loan limits per
county, per state, across thecountry for FHA.
So those are really the biggestbenefits with an FHA mortgage.
It's more flexible for folkswho have less than a perfect

(07:47):
credit score and then FHA is notlike a subprime mortgage.
I think a lot of times peoplethink of FHA and they think, oh,
that's only for people with badcredit.
It's not only for people withbad credit.
Especially over this last yearFHA reduced the cost of their
PMI by almost half and so thatreally made FHA a competitive

(08:09):
product with conventional really, the only downside being that
you've got to pay that privatemortgage insurance for the life
of the loan.
And then one other fee that youhave with FHA that you would not
have on a conventional loan isalso related to the private
mortgage insurance.
With that PMI you have themonthly payment, but with FHA

(08:31):
you also have an upfrontmortgage insurance premium and
that upfront mortgage insuranceis part of the PMI.
It's a one-time fee that's paidat close and it is 1.75% of the
loan amount.
So that one fee and that's theonly fee on an FHA loan that is
included in the loan balance, sothat upfront mortgage insurance

(08:54):
premium is rolled into thebalance of the mortgage.
All the other closing coststhat you would pay when you
close on an FHA loan are paidout of pocket just like they
would be on any other mortgageproduct.
So you have that upfrontmortgage insurance premium,
which is some additional cost.
It's not an out-of-pocketexpense.
So if the interest rate issignificantly lower on FHA then

(09:18):
it would be for a comparableconventional loan.
For your situation it stillnets out as an overall savings,
even though you've got thisadditional upfront mortgage
insurance that gets rolled intothe loan.
So that's FHA, great product.
It's one to definitely take alook at, to ask your mortgage
broker about.
I'd love to be your mortgagebroker, so shoot me a DM, give

(09:41):
me a call.
I'd be happy to help you thenext time you need to finance a
loan.
Hey guys, thanks for listening.
I hope you enjoyed the show andgot some valuable information
out of it.
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(10:03):
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