I read a post just the other day about how VA loan originations have increased over 40% and FHA loan originations have dropped over 24% during the first half of fiscal 2012. Although these results are nationwide, I have not seen the increase of VA loans in the Northwest Indiana area. My guess is that areas closer to military bases are probably seeing a large increase though.

Probably the biggest reason for FHA falling out of favor and VA picking up the slack is the cost of mortgage insurance. While VA loans have a funding fee, FHA has an upfront premium of 1.75% and a monthly fee of just over 0.1% (1.25% a year divided over 12 months). On several of my prospective Indiana client’s homes, this amounts to over $200 a month in mortgage insurance that they will have to pay for a minimum of 5 years on a 30 year loan. This adds a minimum of $12,000, and often much more, to the price of financing a home, since it is in effect until the principle balance gets below 80% of the financed price.

Unfortunately there are not a lot of options for a buyer who has a minimal downpayment. Let me briefly tell you about two of those options.

• Veterans Administration loans – These loan are 100% financing with a reasonable funding fee that can be rolled into the loan (that may be waived for disabled vets). Va loans have reasonable rates and qualifying and are a great choice for previous and current members of the military and their spouses. To check for your eligibility, you can go to the VA Loans Eligibility site.
• USDA Rural Development Loans – This program is my favorite. USDA will allow you to finance 100% of the purchase price, or the appraised value if it exceeds the purchase price. This allows the buyer to roll in closing costs if necessary. They also have an upfront funding fee and a very small monthly fee that is paid for the life of the loan. Qualifying is relatively easy with two exceptions. First, the home has to be in a USDA eligible area. See the map here. Next, there is a cap on income since this program is for low to middle income borrowers. You can check for income restrictions here.

If you do not qualify for either a USDA or a VA loan, FHA is the next best choice, but be aware that the fees are somewhat higher.

In all fairness, FHA has recently raised their mortgage insurance fees in response to a dwindling reserve that they are required to have. They have, for the last several years, been the lender of choice for many, many families and until recently, their fees were not too bad.

Also, starting in June, FHA is going to offer refinances with much lower MI fees. One of the reasons is that rates have decreased over the past several months, but borrowers have not seen a large savings because the new monthly fees are higher than the previous ones they had, making the lower rates less desirable.

If you are in an FHA loan that you have had for the past 3 or more years and would like to see if you qualify for a lower rate and better mortgage insurance pricing, feel free to contact me at scott@nwiloanguy.com. You may also visit www.nwiloanguy.com to get many of your loan program questions answered.

As always, I’m here to help my clients wade through the rules and regulations of the lending business to help purchase or refinance your home at low rates and reasonable fees, even if you have not-quite-perfect credit.

Scott

Your Indiana mortgage expert specializing in FHA, VA, and USDA Rural Development loans.