“FHA” and “First Time Homebuyers” are real buzzwords as far as home buying is concerned…especially when those terms are used in combination. Many readers I’m sure have heard the “FHA loans are great for first time homebuyers” street talk, but without detailed, supporting information as to why.

The intent of this article is to quantify the features of the FHA loan, both good and bad, and discuss the circumstances under which it’s a beneficial program to the homebuyer (either first, second, or third time homebuyer).

First, FHA stands for Federal Housing Authority, and though the phrase “FHA loan” implies otherwise, the FHA does not lend money. Rather, the FHA insures the loan. The money still comes from the lender selected by the borrower, but the FHA now provides an insurance policy to protect the lender in the event of borrower default. With this insurance, the lender has less risk, and so guidelines are less restrictive than with conventional financing.

The reader should be aware that FHA is completely different from Fannie Mae and Freddie Mac (otherwise known as GSEs, or “Government Sponsored Entities”). There has been a lot of buzz recently about Fannie and Freddie, but these entities, and the associated loans, are completely different than the FHA.

Recent events in the credit markets have made the FHA loan a true affordability solution for buyers. In fact, it is this author’s opinion that without the availability of the FHA loan, there would be very few people buying houses these days.

In mid-December of last year, a report began circulating amongst all the direct lenders citing “counties of declining market value” throughout the country. This report placed counties in one of 3 categories: 1) par (little or no depreciation in home values), 2) soft (significant depreciation), or 3) distressed (extreme depreciation). Since that time, the report, and the consequence to lending guidelines, has been revised and updated.

Where things currently stand is that lenders mandate a 5% LTV reduction for soft market, and a 10% LTV reduction for distressed markets. LTV stands for “loan-to-value”, and refers to the maximum amount of financing (as a ratio to the sales price) the lender will allow. So, for example, if a loan program in a “par” market allowed 90% financing, that same loan program in a distressed market would only allow 80% financing.

Since most counties in major metropolitan areas are on this list, hefty down payment requirements are placed on borrowers purchasing homes in these areas. On average, this means 10% down payment requirements in par markets, 15% down payment requirements in soft markets, and 20% down payment requirements in distressed markets.

But this is where FHA loans provide a saving grace. FHA loans are not subject to this “LTV reduction”. Rather, it is only the non-government loan programs (ie Fannie Mae and Freddie Mac) subject to this constraint. Further, FHA loans allow up to 97.75% LTV (so 2.25% down payment). On a $450,000 home in a soft market, this means the borrower only has to put down $10,125 instead of $67,500 on a non-government loan.

The other major benefit of the FHA program is the reduced credit requirements. Whereas non-government loans require credit scores of 700 , the FHA loan accepts credit scores as low as 640.

Is there a catch to all this? Somewhat. The FHA loan carries a mandatory Mortgage Insurance Premium of 1.5% of the loan amount that must be paid at settlement; on a $400,000 loan, 1.5% would be $6,000. This will change to 1.25-2.25%, depending on the borrower’s financial strength, when the new FHA guidelines are released July 14, 2008.

However, even with the 1.5% Mortgage Insurance Premium, the total “down payment” required from the buyer (2.25% 1.5%= 3.75%) is less than with a non-government program (10% in a best case scenario). True, the additional 1.5% fee is not going towards equity, like a down payment, but the total out-pocket expense is still less.

Another “catch” to the FHA loan is that, assuming the borrower does the 97.75% financing (or at least anything above 78%), the borrower will have to pay Monthly Mortgage Insurance (MMI). MMI is similar to PMI (Private Mortgage Insurance on non-government loans). However, the MMI payment of 0.50% of the loan amount is slightly less than a PMI payment would be for the same loan amount.

But is MMI or PMI really a bad thing? Before January 2007 it was, since it was not tax deductible. But as of January 1, 2007, following the “Tax Relief and Health Care Act of 2006” which President Bush signed into law, mortgage insurance premiums are now tax deductible. Before this time, buyers wanting financing in excess of 80% got a second mortgage to avoid MMI or PMI (and 2nd mortgages, when used for a purchase, are tax deductible). But with the new tax law, the mortgage insurance premium carries the same tax benefit as a second mortgage. Thus MMI can be thought of as a “second mortgage”.

And lastly, another “catch” to the FHA loans is they do take slightly longer to process. The reason is that there is more paperwork, steps, and procedures for the lender to go through then with non-government programs. In total, this means about 10 extra calendar days to the process, so 35-40 days instead of the usual 25-30. What I tell homebuyers making an offer on a home and planning to use FHA financing is to simply request a 40-45 day escrow instead of the usual 30. In this market, with sellers eager to sell, this is never a problem.

And those are the “catches” to the FHA loan, but minor if not insignificant in this author’s opinion. Truly, the only real thorn in the “FHA rose” is the 1.5% Mortgage Insurance Premium. And for borrowers that have the assets to afford a 15% down payment, I tell them to use conventional financing, so they can avoid this Mortgage Insurance Premium (and also qualify for a better rate with the larger down payment).

Speaking of rate, the reader may be envisioning a monster rate for the FHA loan. But the rates are in fact quite modest. As of mid-may, wholesale rates on an FHA loan with 97.75% financing (2.25% down) were about 6.00%, compared with 5.625% on a conventional loan with 80% financing.

Thus, with the 15-20% down payment requirements of conventional loans for houses in “areas of declining market value”, FHA loans are a great resource for home buyers unable to afford these large down payments. And since the FHA loan limit has been raised as high as $729,750 in some areas, the applicability is even broader. Yes, there are a few “catches” to the FHA loan, but overall the pros outweigh the cons for the borrower with limited assets.

About The Author:
Jared Martin is President and CEO of GOTeHomeLoans, Inc., an Upfront Mortgage Broker Firm serving CA, DC, MD, VA, and PA. Questions and comments can be emailed to Jared at jaredm@gotehomeloans.com

What exactly is an \”Exclusive Buyer’s Agent\”?

A: An agent who represents only buyers, never sellers, with no risk to their buyers of dual or designated agency on any home they want to buy.

B: An agent who represents their buyers as a designated agent if they want to buy a home that is an in-house listing.

C: An agent who gets paid regardless of whether the agent finds their buyers the home they want to buy or not.

The correct answer is \”It depends on who you ask\”. Let’s discuss each of the scenarios above:

A: An exclusive buyer’s agent is an agent who represents only buyers, never sellers, with no risk to their buyers of dual or designated agency on any home they want to buy.

This is the definition you would find in \”Don’t Risk It! A Broker’s Guide to Risk Management\”, published by the National Association of Realtors in 2000: \”Exclusive Buyer Representation - Also called exclusive buyer agency, this the practice of representing only buyers, never sellers. The company never lists a seller’s property and thus never has a seller as a client.\”

The definition above is also the definition used by the news media in articles written for the benefit of home buyers who are looking for consumer advice in preparation for the purchase of real estate. Internationally acclaimed finance specialist Suze Orman endorses the National Association of Exclusive Buyer’s Agents in the \”Finding a Buyer’s Agent\” section of her popular web site, www.suzeorman.com. Consumer advice columnists Ilyce Glink and Robert Bruss recommend exclusive buyer agency as an alternative to buyer agency to consumers who want to avoid the risk of dual agency - when one broker represents both parties. Ilyce Glink advises: \”If you’re trying to eliminate potential conflicts in your deal, you may want to try (exclusive buyer agency). Exclusive buyer’s agents never represent sellers. They only represent buyers, and they typically will take buyers wherever they want to go in a metro area.\”. Robert Bruss differentiates between the different types of buyer agency services in his article Do Home Buyers Need Their Own Agent?: \”Any real estate agent can be a buyer’s agent to help locate your home purchase. In addition, there are a few exclusive buyers’ agents who represent only home buyers, never accepting listings from home sellers.\”

And June Fletcher from the Wall St. Journal.com writes: \”Exclusive buyers agents can focus on their customers and their needs in a way many sellers agents can’t. They don’t have to spend their time holding open houses, staging properties, or doing all the other marketing tasks that consume much of a listing agent’s time. They can concentrate on previewing homes, investigating comparable houses, helping the buyer understand financing options, negotiating the deal and making sure all the inspections and escrow items are done in a timely manner.

What’s more, home shoppers who use exclusive buyers agents don’t run the risk of falling in love with one of their agent’s own listings. When that happens, the agent becomes a dual agent — beholden to both the seller and the buyer, and thus, beholden to no one. Because this limits the amount of advocacy and advice the professional can give either party (for instance, a dual agent can’t tell the seller the highest price that a buyer is willing to pay), it’s illegal in some states.\”: www.realestatejournal.com

B: An exclusive buyer’s agent is an agent who represents their buyers as a designated agent if they want to buy a home that is an in-house listing.

The news media is doing a great job of advising consumers to ask for an exclusive buyer’s agent in order to avoid the the conflict of interests that exists with dual and designated agency (which legally is \”dual agency\” in NC, since the same broker represents both parties.) But the problem is now that consumers have started asking for an exclusive buyer’s agent, listing agents are representing themselves to consumers as \”exclusive buyer’s agents,\” and are advising consumers they can provide exclusive buyer agency representation - even on in-house listings! The reason for this is that the NC Real Estate Commission does not recognize the definition for exclusive buyer’s agent published by NAR in 2000, and since then, picked up and popularized by the mainstream news media. As a result, many real estate agents who practice designated agency on in-house listings regularly advertise themselves to consumers as \”exclusive buyer’s agents.\”

C: An exclusive buyer’s agent is an agent who gets paid regardless of whether the agent finds their buyers the home they want to buy or not.

The NC Real Estate Commission allows NC real estate agents to call themselves an exclusive buyer’s agent if their buyer client signs an \”Exclusive Buyer Agency Agreement.\” The NC Exclusive Buyer Agency Agreement is a contract which states that the buyer’s agent gets paid no matter who finds the home, and restricts the buyer to the buyer agency services of the agent/firm with whom the buyer has the buyer agency agreement. The NC Real Estate Commission acknowledges this usage of the term is pervasive throughout the industry in NC, but does not consider it a deceptive practice because no legal definition for this term exists in NC. The following terms: \”Buyer’s Agent, Seller’s Agent, Dual Agent, and Designated Agent\” are all defined in the state mandated Consumer Disclosure Brochure called \”Working With Real Estate Agents,\” but the definition for \”Exclusive Buyer’s/Seller’s Agent\” is a glaring omission from the agency options that are disclosed to consumers in this brochure.

In many states including NC, \”Buyer Beware\” remains the adage for consumers who want an exclusive buyer’s agent to represent them in their next real estate purchase transaction. A refreshing exception is Ohio, where their state legal disclosure, \”Consumer Guide to Agency Relationships,\” was developed jointly by the Ohio Association of Realtors and the Ohio Division of Real Estate and Professional Licensing. Under Ohio license law, each brokerage must disclose which of five agency policy options their company practices and offers to consumers, including an option for exclusive buyer agency: \”Under this policy, your brokerage only represents buyers, and does not take listings, practice subagency or dual agency.\”

Real Estate industry expert and columnist Peter Miller sums up the argument best for including exclusive buyer agency as an additional agency option in the NC Consumer Disclosure Brochure: \”Brokerages should always include listing brokers and buyer brokers, exclusive or not, so that individual professionals can pick the practice strategy they prefer while consumers can find the widest array of services. Exclusive buyer brokers changed the marketplace by popularizing the core concept of buyer brokerage. That’s a transition which now helps millions of purchasers get a better deal in the marketplace - and that is a significant accomplishment.\”

Since no legal regulation for exclusive buyer agency exists in NC, before proceeding with a self-proclaimed \”Exclusive Buyer’s Agent,\” consumers are advised to question their real estate agent’s interpretation of this loaded real estate term.

About The Author:
Julie P. Tuggle is broker-owner of Carolina Buyer’s Agent, an exclusive buyer agency in Charlotte, North Carolina that represents only buyers, never sellers, on the purchase of Charlotte homes with no risk to their buyer-clients of dual or designated agency representation on any home they want to buy. Julie can be reached at: juliet@charlotte-eba.com

Applying for a home mortgage goes well beyond filling out a few forms and awaiting approval for a conventional or jumbo loan. There are mistakes you must avoid when applying for a home mortgage and any one of the ten listed can wreak much havoc, even scuttle the loan. Let’s take a look at potential mistakes and how you must avoid them to ensure that your mortgage is approved without a hitch.

1. Getting prequalified, but not pre-approved for a home mortgage. No matter whether you are seeking a home that will be conventionally financed or one requiring a jumbo loan, getting prequalified by a realtor is a waste of everyone’s time, while getting pre-approved by a Texas mortgage broker is many times better. Prequalification really does nothing, while pre-approval means that you have a loan in hand. Better yet: get pre-approved and have a letter of approval with you when shopping for a home.

2. Letting credit problems continue unabated. Did you know that you could get free copies of your credit report from each of the three major credit-reporting bureaus? That’s right, on an annual basis you can get one free report each from Experian, Equifax, and Trans Union and find out what is on your credit report. If there are errors or things that need improvement, you can address these problems ahead of time. For approximately $5 - $7 you can get your credit score too. The higher your score, the lower home mortgage interest rate will be. You could save hundreds of dollars per year with this little bit of extra knowledge.

3. Too much house, too little money. Perhaps you could get approved for a more expensive home, yet after calculating all of the other expenses in life, you learn that you will be stretching making monthly Texas mortgage payments. Don’t jeopardize your future; if you cannot repay your conventional or jumbo loan, your home could be repossessed. Instead, purchase a home within your means.

4. No rate lock for your conventional or jumbo loan. As Texas mortgage rates rise, you can be assured of a low, fixed rate if you lock in the rate. Imagine getting a great rate only to see it get kicked up a half of a percentage point before you close, costing you hundreds of dollars extra per year! The higher rate could even cost you your loan.

5. Excessive closing fees. You may be able to afford monthly Texas mortgage payments, but can you afford the closing fees? If you aren’t careful, you could pay thousands of dollars in extra fees before your home mortgage closes. Get a good faith estimate to find out the fees in advance of your closing.

6. No residual funds leftover. After buying a home, do you have enough money on hand to pay for maintenance costs? Utility bills? Other unforeseen expenses? With no cash on hand, you could soon see yourself running up big credit card fees to pay for expenses.

7. Not using a professional inspector. In some jurisdictions, using a home inspector isn’t required. While tempting to not rely upon the services of a trained professional, you may miss an important structural problem and have little or no recourse at closing. Ultimately, by not using a professional inspector it could be one of the costliest mistakes that you make.

8. Waiting on home insurance. Before you can close on your home, you must have a home insurance policy in place. Don’t wait until the last minute to get insurance as you could run into delays that may push back the closing date of your home.

9. Signing documents without reading them. Don’t assume that the verbal agreements you made are the same as the written agreement you sign. If a problem arises, the written agreement will trump the verbal agreement, no matter how well intentioned either of the parties may have been.

10. Relying on a set closing date. Life happens and closing dates can shift. If you are renting and seeking to move on the same day that your home mortgage close, you could find yourself homeless if the closing date shifts. Build in a buffer of several days to a week to protect yourself.


There are other deadly mistakes that can occur after you have already moved into your home. Chief amongst them is bad mortgage refinancing where owners leap for a lower rate without calculating the closing costs. You may find yourself eligible for mortgage refinancing but learn too late that with all of the closing costs added in, your savings could be wiped out. Better to make certain that your mortgage refinancing plans are checked by an accountant specializing in mortgage refinancing options before agreeing to a new loan.

If you are looking for additional articles on mortgage and real estate for your web site or your newsletter, go to: http://groups.yahoo.com/group/Free-Reprint-Articles for the best selection.

About The Author:
Frank Oakerson is a licensed loan officer #56753 in the state of Texas. I am available to assist you in purchasing your first home, bad credit mortgage, FHA Loan, VA Loan, you name it. At YourMortgage123.com you will find a number of informative articles, mortgage calculators, info on VA loans, mortgage refinancing, stop my foreclosure, and getting pre-approved. Stop by and let me get started on a Texas mortgage for your property today. I have all of the information and tools you need to make your home buying dreams a reality. http://www.yourmortgage123.com