Recently I was speaking with a neighbor of mine in Los Gatos who’s a high powered lender with decades of experience all over Santa Clara County. In the last year or two she’s been doing many more FHA backed loans, rather than conventional ones, as smart home buyers, especially first time home buyers, try to get into a house while both home prices and interest rates are at record lows. This makes a lot of sense as it can take a long time to save 20% or more and in that time, both interest rates and real estate prices in Silicon Valley could go through the roof. (If my kids were out of college and working, I’d be encouraging them to buy a home using FHA backed financing too.)
FHA backed mortgages do require a lot more work, though, so I extended my sympathy that she’s having to jump through so many hoops and that they are for much smaller sales prices (many areas of San Jose have dropped 35 – 40% since the market collapse). Mortgage brokers often make about 1% of the value of the loan as their compensation, so I imagined this great loan officer spending twice as much time with FHA paperwork as on a normal loan, on a smaller priced property, resulting in “half the pay for twice the work”.
Apparently that’s not the case with FHA loans!
“It’s better for me when the buyer uses FHA”, she assured me. Really? “Instead of getting 1 point, we are often paid 2.5 points when we close an FHA loan.” That didn’t seem unfair to me since there’s a lot more paperwork involved. But consumers probably don’t realize that their banker or mortgage broker will be paid much more if the loan is FHA backed rather than conventional.
If you have saved enough money for a conventional loan product but your lender is pushing FHA, be doubly careful before deciding what to do. There are pros and cons to each loan product you buy (you are “buying” or “paying for” a loan). Make sure that you aren’t getting FHA financing only because it is more profitable for your lender.