Changes to FHA interest rates?

[Thomas Daly]

Hello! I am in the middle of my pre-approval process and my plans have encountered a bit of an obstacle.

I was planning on using FHA as a first time home buyer with the goal to owner occupy a duplex. This financing option fits me best as I do not have the capital to put down a 20% conventional loan for my target price range.

I was advised by my lender that for a owner occupied duplex my (very high) credit score qualifies me for the following conventional:

-15% down

-3.37% interest rate

-30 year fixed

I was told that this is the lowest down payment I could get for a conventional loan. And that the only other options for a lower down payment on an owner occupied duplex is a first time home buyer program that I do not qualify for because my salary is to high, and of course FHA.

I was told that FHA has changed given the current COVID19 situation and that FHA does not want to insure loans so they are making the terms high in the form of high interest rates.

I have searched the forums, twitter, google, etc, and cannot find firm data confirming this. I actually am finding the opposite on mortgage rate average websites that state FHA interest rates are still lower than conventional.

Does anybody have an idea on what is going on with FHA? I would love to use this financing option, but if the interest rates are high I guess I will just wait for COVID to slow down and hope the rates change.

[Jonathan R McLaughlin]

@Thomas Daly first we should keep things in perspective. 3.37% or anywhere near it is a fantastic rate and if you can swing 15% thats a great loan. Aren't FHA rates similar right now?

Usually you will wind up with PMI for the equivalent of a higher rate, but if it won't do well as a house hack at the equivalent of 5% or even 6% it probably isn't the best deal. It wasn't so long ago those percentages were being cited as historic lows. Classic way is to use FHA as an entryway then refi out to lower costs.

[Thomas Daly]

Originally posted by @Jonathan R McLaughlin:

@Thomas Daly first we should keep things in perspective. 3.37% or anywhere near it is a fantastic rate and if you can swing 15% thats a great loan.  Aren't FHA rates similar right now? 

Usually you will wind up with PMI for the equivalent of a higher rate, but if it won't do well as a house hack at the equivalent of 5% or even 6% it probably isn't the best deal. It wasn't so long ago those percentages were being cited as historic lows. Classic way is to use FHA as an entryway then refi out to lower costs.

Thanks for the response @Jonathan R McLaughlin. Good points on the perspective of rates being at historic lows, I am very happy about that :) What I am confused about is the feedback I am receiving that FHA interest rates are very high. I was assuming FHA interest rates would be similar, if not better, than conventional. I was doing my analysis logic on a FHA loan with 3.5% down, a competitive interest rate, and the PMI. What I am now finding is that the interest rates are high on FHA so it throws off my analysis logic unfortunately. Perhaps I shop around to other lenders?

[Wayne Brooks]

@Thomas Daly It’s simple....just call a few local lenders/banks and Ask. They’re also published in various places. 

Do realize though that with FHA....

less than 10% down, MIP is for the life of the loan
10% or more down, 11 years

[Jonathan R McLaughlin]

@Thomas Daly I saw the published rates as being competitive but those are inverted sites and it wouldn’t surprise me if banks are pulling back?

Lots of anecdotes about rates going up due to the emergency fed loans and supercharged volume so maybe that’s it? @chris mason has a lot of good posts behind the curtain on lenders and I believe he has addresses this recent phenomenon directly.

What actual quotes have you been getting out of curiosity?

[Harjeet Bhatti]

@Thomas Daly Some of lenders has change the requirement for FHA loan for 90 days. The interest rate is not impacted due to this change. More strict guidelines has been imposed because of current situation. FHA hasn't change anything.

[David M.]

@Thomas Daly

Yeah, the mortgage market is all topsy turvy with COVID-19.  i would have thought they still would have let you do a conventional 5% down.  If your credit score is high, its actually cheaper (I spoke to a loan officer not too long ago and still true) to get private mortgage insurance instead of the Government insurance.  The rates were about the same.  Are you working with a traditional bank or a mortgage lender/broker?  That latter entities have more flexibility than the former since they aren't regulated as heavily.  You might want to try a different lender.

Maybe because I haven't personally done it for my personal investments, but from what I have seen with other clients, I don't really get the allure of the FHA other than if you have poor credit and/or really need that extra 1.5% down difference to get to 3.5% instead of 5%.

Good luck.