FHA Loans — Show Me The Money

by Peter G. Miller
June 1st, 2007

I was over on the Ginne Mae site and discovered an interesting set of calculators.

Ginnie Mae is a federal agency that buys loans from lenders. It’s a part of the “secondary market” like Fannie Mae and Freddie Mac, except that it remains a part of the federal government and is not owned by private shareholders.

Anyway, Ginnie Mae buys FHA loans from local lenders. The lenders get cash to make new loans and Ginnie Mae gets loans which meet FHA standards. The loans generate interest which Ginnie Mae uses to buy additional mortgages.

On the Ginnie Mae site there’s a loan calculator which compares what happens if you finance a home with an FHA, VA or conventional mortgage. Fill in a few blanks and some interesting results come up.

To work the system, I tried to buy a $300,000 house in Washington County, Maryland, an area in the western part of the state which includes the Antietam Battlefield. I figured a 6.25 percent interest rate and a 30-year loan term. I told the calculator I had $30,000 in cash for a down payment.

Here’s what happened:

Home Price: You can buy $300,000 home with VA and conventional financing in Washington County — but not under the FHA program. Huh? How come? The answer is that the maximum size of FHA financing depends on location. Unlike other parts of Maryland, Washington County is a lower-cost area. The most you could buy with FHA financing was a home worth $277,771.

Amount Down: The VA and FHA loans would gleefully use the $30,000 but with conventional financing you would need $45,000, according to the calculator. Given that a “conventional loan” is typically defined as a mortgage with 20 percent down it seems odd that the Ginne Mae calculator shows that a borrower would need $45,000 and not $60,000 (20 percent of $300,000).

Cash To Close: The calculator shows that a buyer would need $30,000 to close the VA loan, $54,805 to settle with conventional financing (a number which may be $15,000 short if you need 20 percent down) and $30,000 for an FHA loan. Of course, the reason the calculator shows $30,000 for both the VA and the FHA is that we said that’s how much cash we had for the transaction. In practice, you need zero down for a VA loan and 3 percent down for FHA financing, plus closing costs.

Closing Costs: The calculator says that you would pay $10,512 in closing costs with a VA loan, $9,805 with a conventional mortgage and just $2,559 with an FHA loan.

What does this calculator tell us?

First, there are so many variables with a mortgage that it’s difficult to capture them with an online calculator.

Second, borrowers are best served by speaking with several lenders and getting offers on paper with a Good Faith Estimate and a Truth in Lending statement.

Ginnie Mae Loan Calculator
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