Expert: Diann Tonnesen - 6/20/2007

Question
QUESTION: Hello, We are buying a home this summer and will most likey get an FHA mortgage. I have some questions about FHA special programs that may fit our financial situation. The hud site does not answer these questions specifically.

1) Are interest rates on FHA growing equity mortgages lower allowing us to quailfy for a larger home? (I will finsh school in 2009 and add 40k to our present income)
2) With an FHA Graduated payment mortgage, could we also qualify for a larger home based on the first year payment?
3) What is the down payment requirements for both loans?

ANSWER: Hi Diane,

If you are going to have an increase in income in the future, an FHA graduated mortgage payment may be your best bet AT THIS TIME, as you can qualify for a larger home based on the earlier payments. But be aware that HUD is currently changing many of their loan programs and some are being discontinued or the guidelines are being drastically altered. The standard down payment for an FHA loan is 3%.

But you really want to also check into conventional mortgage programs as well. There are some great programs that may be even better than an FHA loan for you. And in many markets, the conventional loans have a lower interest rate than the FHA loans. Try to find a lender that can do both kinds of loans, so that they can show you the advantages and disadvantages of each type. A lender should give you a "Good Faith Estimate" that shows all the costs associated with each type of loan as well as the total payment and interest rate.

Good luck with your house hunting! Do you have a good agent to work with? If you need help finding one in your area, let me know and I will help you "interview."  :)

---------- FOLLOW-UP ----------

QUESTION: Thanks for your prompt response. We considered FHA because as of July 14 we will be discharged chapter 7 for 24 months. We are meeting with a broker that does both FHA and conventional loans on July 14th. Our scores are in the mid 600's. I was especially interested in the Growing Equity mortgage and whether that was a better option since there is no negative amortorization but only if the interest rates are significantly lower due to less risk for the lender. I had heard that the GMP required more than 3% but no percentage is actually given. Does each lender have a lot of leeway regarding the interest rates that are set and specific rules? Finally, how can I get more info about programs that may be discontinued? Like I said, we are applying in about a month. Thanks Diane

Answer
It is tough for me to answer interest rate questions as each lender has their own guidelines! Rates are NOT set by HUD, but by the rate at which the individual lender can "buy" his money. And each day they send out their own rate sheets to their employees to quote from. On top of that, each lender figures out how much he wants to "make" on the loan, which is his income. And some lenders have in house "specialties." One lender may offer a better rate on GMPs, but be higher on the growth equity than another lender.

That is why there can be a variation on the rate quoted for a particular loan even within the same company. Each lender does have some leeway in what can be charged, though usually it is not a lot. Obviously he has to cover his cost, remain competitive with the market and yet still make a living.

The GMP is 3% down, but there is also an additional amount to buy down the rate in those first years that may be an additional 2 3/4% or more. It may be possible to negotiate for the seller to pay that.

I am not a huge fan of FHA loans if I can find an equivalent or better conventional loan. And there are conventional loans for people who have had a bankruptcy. Just make sure you check ALL your options before determining which kind of loan will be the best for your situation. I would get quotes from several different lenders on all the different programs, but you do need to make sure you get those quotes on the same day. Rates change daily (and sometimes even hourly) and you want to know that you are comparing apples to apples.

Hope this helps!!