October 22, 2017

Five Things Your FHA Lender Won’t Tell You

For many years, owning a home was the culmination of the American dream.  Besides the emotional satisfaction of ownership, it was assumed that housing prices could only go up.  It became an unchallenged belief that buying a home was always a wise decision.  The housing collapse that started in the 2008 has now made the decision to purchase a home a much riskier proposition.

New home buyers need solid financial advice to evaluate the benefits and risks of home ownership.   Unfortunately, many potential home buyers lack the ability to adequately evaluate whether it makes more sense to rent or own.  Making matters even worse, virtually every professional that a potential new home buyer will encounter while house hunting has a vested financial interest in “making the sale happen”.  Most first time home buyers seek advice from both their real estate agent and lender, perhaps not realizing that both are commission driven – no home sale, no paycheck.

During my many years in the mortgage industry, I rarely had a new home buyer ask whether purchasing a home made financial sense or if it was better to postpone the move from renter to home owner.  Lately, this situation is changing as millions of people find themselves trapped in homes that they can’t sell and can’t afford.

Although FHA mortgage lenders are subject to many rules and regulations, here are five things that they probably won’t mention to you.

1. Waiting to buy until you can make a larger down payment will allow you to avoid expensive FHA mortgage insurance (see FHA Mortgage Insurance Very Costly For Borrowers).

2.  If you are paying off an existing FHA mortgage, always schedule the closing at the end of the month since the FHA charges interest for the full month regardless of what day of the month the loan payoff occurs.

3.  An FHA loan can be approved despite the fact that the borrower will have no cash savings after the closing, leaving a new home owner exposed to any unexpected expenses that come up.  Is this the type of financial stress that a new home owner wants to risk?

4.  An FHA loan can be approved at very high debt ratios.  The result is that a substantial portion of the borrower’s income will be consumed by monthly housing expenses, leaving little disposable income for other expenses.  If a borrower has a high debt ratio and no savings, is it smarter to wait until the borrower’s finances are in better shape?

5.  Virtually every FHA borrower is instantly in a negative equity situation.  With a minimum down payment of 3.5%, a borrower who must sell in a short period of time would need to bring cash to closing to cover closing costs that can average 6 to 10%.  A continued decline in home prices would make the situation even worse.

Mortgage lenders and real estate agents are not financial advisers and cannot be expected to act as such.  Potential home buyers would probably be wise to seek the counsel of a financial adviser or accountant prior to deciding to buy a home in order to fully understand the financial obligations and costs of home ownership.  Buying a home should not be a purely emotional decision.

Another option is to use tools on the web to decide if buying or renting makes the most sense. One of the best financial calculators I have seen that analyzes the cost of renting versus buying can be found on the New York Times website.  After entering your information, the calculator provides a detailed comparison summary of costs for renting versus buying.  The calculator allows you to make comparisons based on estimated changes in rental costs, housing appreciation/depreciation and how long you will stay in the house.  For a first time home buyer, this should be your first step in starting the home buying process.