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VOL. 37 | NO. 32 | Friday, August 9, 2013

Once-great FHA loans might not be best bet

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Since its creation in 1934, the Federal Housing Administration (FHA) has assisted more than 34 million buyers achieve the “American Dream” of home ownership.

In its infancy and even into the 1980s, FHA loans were the loans of choice for first-time home buyers or any buyer buying a home for less than a certain price.

Benefits of an FHA loan include a small down payment, a credit score leniency and the ability to add co-borrowers with ease. Until recently, a down payment of one percent would allow buyers to purchase.

Another benefit: The FHA appraisal also served as the inspection, thereby sparing the expense and ensuring the house had been given the once over.

When conventional lenders decided to compete with FHA for those with little cash on hand, things got messy. Soon enough, there were conventional loans with no cash needed. If the seller paid some closing costs, buyers could leave the closings with their wallets filled with cash along with a deed to a house.

Such practices contributed to the savings and loan failures in the late 1980s and early 1990s.

Following the bailout and some reforms, FHA once again became the loan of choice. Then subprime lending came into vogue, and most living humans could qualify for loans. FHA faded into the night.

When a buyer did resort to an FHA loan, sellers were hesitant to enter into contracts as the visions of the rigorous appraisals (inspections) danced in their heads.

In 2008, the world changed. When financial institutions re-emerged, they were unrecognizable with layers of regulation. FHA escaped after selling its soul to Department of Housing and Urban Development.

Mike Smalling, a lender with Cornerstone Lending in Brentwood, is a veteran of these financial wars and has been in the battlefield for years. “Since there is no more sub-prime market,” Smalling says, “FHA has become the new sub-prime.”

FHA’s new guidelines loom large in Smalling’ opinion. Once a proponent of FHA loans, he now says there are a variety of issues. First and foremost, the mortgage insurance premium (MIP) that must be paid at closing is now 1.75 percent. With a maximum loan amount of $423,000 in Davidson County, that could be as much a $7,400 and, in some cases, it is financed.

To make matters worse, the MIP is permanent.

In the past, once the loan balance was 80 percent of the value of the house, the borrower could have the MIP removed.

To quote the raven, “nevermore.”

While FHA now requires 3.5 percent in the form of a down payment, allowing the borrower to finance the MIP negates the intent of the larger down payment.

Additionally, Smalling notes the “historic nitpicking of appraisers with FHA loan” and explains that “even though today repair requirements tend to be similar with FHA, contract negotiations seem to be easier with conventional than those with FHA attached.”

What should FHA loan candidates do? Smalling is a big-picture man and has the answer. Smalling says the conventional 97 percent loan is the answer, as the MIP is $50 per month less and the cash required to close is $1,000 less on the conventional loan.

As the Nashville market is a rising, if not soaring, mortgage insurance could be dropped by the end of the fourth year without requiring additional payments to principal.

In summary, Smalling states that “when someone has excellent credit, conventional is the way to go - cheaper monthly payments (due to cheaper MI), smaller down payment, MI can go away and an easier contract negotiation.”

He is quick to add that FHA remains the only option for many, especially those would-be buyers with credit scores

between 620 and 680 or in cases when down payment assistance is needed. The Tennessee Housing and Development Agency and the Housing Fund provide down payment assistance and work in conjunction with FHA for those in need.

Sale of the Week

Linus Catignani sold his listing at 1505 Paris Avenue in a mere 12 days for $730,000. It has 3,310 square feet, including 571 in the basement.

When commanding $216 per foot, subterranean footage is referred to as the lower level.

Linus is from the old Nashville Catignani family. For the uninitiated, the name is pronounced as one would provide care for an infant feline, or cat nanny.

Tax records reveal Linus himself owned this property, having purchased it for $285,000 in early 2012.

Richard Courtney is partner with Christianson, Patterson, Courtney and Associates’ and can be reached at Richard@ richardcourtney.com.

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