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Stay away from FHA scam

FHA loan is a total rip off that one should stay away from. Look for a conventional loan or don't buy that dream house or at best foreclose/short sale that house. But never go for an FHA loan because it is way costlier than you think:
1.The upfront PMI you pay to secure the loan which is anywhere from 1-1.50% (may have changed again) of the loan value. If someone tells you that you get refunded when you refi the loan then either they don't know what they are doing or are simply lying. Only way to get a marginal % of the refund only if you refi FHA into another FHA that too within 2 yrs.
2.Plus, the monthly MI you pay every month (same % as above but PMI /12 months). This one also gets decided at the time of securing the loan & does not change unless your LTV goes below 78% or only after 5-6 years later. How often that happens? So don't be under the impression this monthly MI changes as you pay down the loan.
3.FHA requires you to have HO6 insurance if you are in a condo or a townhouse. Even for an independent home, they expect higher insurance limits. Banks insist for additional insurance because FHA is considered a high risk loan. You also have to impound your taxes & insurance. Your monthly payment includes all & you cannot change it for the lifetime of the loan since property taxes and insurance are also considered as monthly mortgage.
4.You get very little info from the bank and HUD/FHA pre/post securing loan. You have to get onto HUD website or Google to your glory to learn more. HUD also changes rules every year and how YOU as an individual keep track these constantly changing stupid rules is beyond me. And loan agents are also clueless.
So, DO NOT GET MISLEAD BY THE LOW, SEXY APR FHA loan. Consider other loan options, even if that option includes not buying that dream house at this time in your life, but STAY AWAY FROM FHA LOANS. IT IS AN OFFICIAL PONZY SCHEME TO RIP THE POOR GUY OFF. Hope my experience saves you from FHA scam.
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June 06 2012 - US
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Replies (20)

Profile picture for sunnyview
Sorry you had a bad experience with FHA. The low down % available is a positive for many people looking to buy for the first time or for people with lower credit scores.

Many buyers feel that the higher fees are worth the some trade offs that you mentioned if it means that they can buy sooner. It is important to get all the information you can before you decide what mortgage is right for you. Finding a good lender can also be an excellent resource.
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June 06 2012
[inappropriate. Deleted by Zillow moderator.]  FHA loans have been around forever and have helped millions of first time homebuyers get into their first homes. (including myself 12 years ago)

They will allow people with lower credit scores to buy than a traditional mortgage will allow.

They will allow people with no money for a down payment, but can get a gift from family to buy homes when conventional loans will not.

They have programs that will give you extra money for home improvements and repairs financed into the same loan you use to purchase the property.

If you were such a victim, why didn't you just put down 20% and go with a conventional loan and not have to pay mortgage insurance at all?

By the way half the crap you are complaining about is totally inaccurate. The upfront mortgage insurance premium takes a full 3 years to consume, not 2.   The MIP is 1.75%, not 1.5%.   Plenty of people have paid down their mortgages under 78% and been able to cancel the monthly mortgage insurance. It happens all the time.

Most loans require HO6 insurance on condos, not just FHA. Plus why wouldn't you want to have insurance to protect your investment? You probably hate having to pay car insurance too... until you get in an accident that is.

Most states require an impound account for taxes and insurance if your loan to value is over a certain amount, it is not specific to FHA loans.

You are actually complaining about the low interest rates that FHA offers?

[inappropriate. Deleted by Zillow moderator.]

 
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June 06 2012
Profile picture for RealEstateVictim
Wow, Mr. Brian, take it easy and easy with your language. I never said you were my lender who mislead me!!!

Everyone entitled to have opinions and some people go thru bad experiences with bad lenders.  You are a lender and you have your side of the story as businessman. I am borrower and this is my side of the story and experience. I am not misleading anyone but only suggesting others to not trust every lender on earth (no matter how hypocritical or bully he may be) but do your homework before signing up for any loan. Yes, my WF loan agent told me I could get the upfront PMI back if I refi my FHA loan into a conventional loan within two years. I showed him the HUD website article that he is wrong.

BTW, the moment I gathered this FHA information, I put down additional money and went for a conventional loan. Sorry, you missed one customer!! :)

See how polite Sunnyview comment...gosh, where are those values?!!
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June 06 2012
Sounds like you have a beef about the Wells Fargo lender that you dealt with and not FHA in general.  As Brian mentioned FHA has put many people in a home that normally would not have qualified.  Additionally they have always had a streamline refinance program in place that allowed people to lower their rate no matter the value.  That was not always the case with a conventional loan. All the points that you made are common knowledge for any experience Loan Officer and should have been explained upfront. Lately FHA has increased their fees to not only control their overall exposure in the mortgage market but also to make up for the losses they have incurred. Lastly I do not think anyone would ever say that the APR on a FHA is sexy. After the UFMIP and monthly insurance, there is not a bigger spread from the actual not rate out there.
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June 06 2012
Profile picture for Go Huskers
" So, DO NOT GET MISLEAD BY THE LOW, SEXY APR FHA loan."

This may be where your problem lies. FHA mortgages don't have a low sexy APR, they have a very high, unattractive APR when disclosed properly. As previously stated, you seem to have had a terrible experience with a loan officer or institution that mislead you and not the FHA program itself. When working with a properly licensed and experienced loan officer, everything is disclosed up front so you can make an informed decision on what is best for you.
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June 06 2012
Profile picture for RealEstateVictim
Thanks to all for your polite and pleasant responses and sharing your thoughts.

Not all lenders and loan agents are same. The essence of my WF loan agent's pitch was how low the APR on the loan. But one has to put the upfront PMI, the monthly MI plus HO6 insurance to know arrive at the total cost of the loan or monthly payment.

BTW, WF insisted that I should take HO6 even my master policy covers 100% interior and exterior. Why? Because reason given that it's FHA guidelines and the underwriter (not just the loan agent) refused interpret or understand the insurance document. I am not here to pinpoint WF, my friends/neighbors went thru Bofa and had the same experience. I had to point WF to CA law (other states may have the same) that lenders cannot force borrowers to buy additional insurance to finally get WF to do their homework.

I am not putting the entire blame on FHA program but things get really confusing or complex given the that the lenders point at HUD website for details and HUD says we sit behind the lender and don't have to educate or directly deal with borrower.

When I put numbers together, I would have paid around $12K b\w upfront and monthly PMI in the first year of my FHA loan. But I put that towards my savings.

So my only suggestion or point was that there is not difference in the rate or cost b\w FHA and conventional except you could own a house sooner even IF you don't have a good credit or enough down payment. And there are people like me who choose to wait for one more year to gather enough down payment & go for a conventional loan.

Some lenders\brokers do take advantage the gap between HUD and the lender. I guess it needs to be tightened so people like me don't call it a scam.
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June 06 2012
Profile picture for Go Huskers
" The essence of my WF loan agent's pitch was how low the APR on the loan."

What APR were you quoted and what was the note rate? This is my entire point. An FHA APR is much higher than a conventional APR without mortgage insurance so if you were quoted a low APR on a 30 year FHA mortgage, it was done fraudulently. Had you been quoted a proper APR you would immediately have known it was more expensive.
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June 06 2012
This one also gets decided at the time of securing the loan & does not change unless your LTV goes below 78% or only after 5-6 years later. How often that happens? So don't be under the impression this monthly MI changes as you pay down the loan.

Sorry you were given wrong information on a potential MIP refund. The monthly MI payment decreases every 12 payments.

Since you were given wrong and incomplete information about FHA loans, here are some things to consider. If you have 5% down and a high score, you are looking at an FHA rate today of 3.25% on a 30 Year vs aprx 3.625% on a conforming loan. If the FHA rate is moved up to 3.5% then you will PROBABLY get enough lender credit to pay for the UFMIP of 1.75% so that leaves you with a 3.5% rate and a slightly higher monthly MI payment vs the conforming 3.625% so conforming is still cheaper. On the other hand if you have a 675 Fico you still get a 3.25%-3.375% FHA rate vs a conforming rate of around 4.00 - 4.125% due to the price adjustment for credit score. The MI on a conforming loan with 5% down and 675 score will be close to the FHA MI payment, plus if you move the FHA rate up to 3.75% you will pay for the UFMIP and another 1.5 - 2 points or so to offset other closing costs. In that case the FHA loan is a no brainer. Removing the monthly MI payment on FHA  does require you to pay the balance down to 78%, with a minimum of 5 years of payments if term over 15 Yrs ) so that has to be factored in when looking at a 10 year expense window. On the other hand, if the subject property has little appreciation over the next 10 years that will not matter much anyway. As Huskers and Joe pointed out, the APR on an FHA 30 Yr will have a large spread due to the mortgage insurance, but then so does a 95% conforming loan with monthly MI.

 
  

    
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June 07 2012
If I read that correctly, Clay has three hands.
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June 07 2012
It would appear that Clay does have three hands.  It also shows that there is nothing wrong with this program or others that are out there.  It is all about the person you deal with and there ability/desire to lay out all the options.
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June 07 2012
More is better :)
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June 07 2012
Profile picture for Go Huskers
" More is better :)"

 
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June 07 2012
Profile picture for user8788156
Totally Agree with you on that one!  I was  trying to buy a house that needed $4K of work....4K!!!! and the lender said they couldn't take the risk on that, and that I would have to get FHA...(lol) so after the extra APR, PMI, trying to find someone to appraise it...it would have cost me so much more than the 4K to fix it, it was not worth getting the house. If you're so bad off that you can't afford a house without FHA, then it might be better to wait than to go with that scam. Any realtor that tries to tell you its this awesome thing is just trying to get a sale.
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January 22 2013
Profile picture for RealEstateVictim
I guess, other than me, you are the only other buyer on this forum who has seen the buyer's point of view and provided feedback.

Everyone else here seems to be either a realtor or loan broker. They may have taken the FHA loan in the past (as they claim) but from my personal experience I don't think it is a viable option, financially.

If one cannot make enough down to buy a home then it is better to wait to save money and then buy an affordable house. It hurts but it definitely helps in the long run....and we may not see another housing crash in near future!!
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January 22 2013
You are unfortunately Grossly misinformed. When comparing an FHA loan and a Conventional loan side by side the FHA loan with the upfront and monthly can still be a much better option depending on the rate differential. Please note that if you are 740 + borrower with the ability to put down 5% than yes a LPMI conventional loan will be less per month than and FHA loan until the Monthly MI on the FHA loan falls off, but if you stay in the property for the full 30 years you may still end up saving more money on the FHA loan.

Even more important is the fact that most people whom choose or use an FHA loan are not actually qualified for anything else. Conventional loans get costly quick with lower down payments, lower credit scores, and still require mortgage insurance above 80%.

I used an FHA loan to buy my house and did not even have monthly mortgage insurance, (ask how if you wish) I got a better rate than on conventional, and my costs were minimally higher.
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January 22 2013
Profile picture for user4973838
I agree whole-heatedly with this post.  As a buyer, in the midst of closing on a home, I will tell you that the conventional 97 product is a better product for the consumer.  Especially because FHA has made yet another change this year requiring PMI throughout the life of the loan.  Even though PMI is required for conventional products, when you bring <20% to close, it will still cancel out (no refi needed) when the your loan amount reaches the 22% threshold. 

FHA Loans are taking advantage of lower income borrowers by over charging them different ways, this cancels out the lower interest rated.  I really wish that someone would call them out on a higher level, bringing more awareness to the faults in their product.
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July 16 2013
I'm not sure why everyone keeps stating that the monthly mortgage insurance will drop off at 5 years or 78% LTV. Unless you put 10% down on an FHA loan, the monthly MI is now on the loan forever. It doesn't matter if its a 15 or 30 year loan. If the FHA case number was pulled after June 3rd, 2013 you are stuck with MI forever unless you put 10% down.
   FHA has definately shot itself in the foot by all the recent changes it has made.
   There is still a very small percentage of borrowers that benefit from FHA loans being available, as they wouldn't qualify for other types of financing.
   FHA had become popular over the last 5 or 6 years because after the housing crash private mortgage insurance companies made it impossible to obtain private MI on conventional loans except for the most highly qualified buyers. Unless you had stellar credit, income, and assets--you either had to put 20% down or go FHA.
   The pendulum is now starting to swing back and the MI guidelines have loosened.
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July 16 2013
  I am certainly sorry for your bad run in however it is not a scam at all it is just a different way of financing an estate. Not every can qualify for Conventional, VA, etc. and like anything else not everyone is financially independent. As consumers we see that new shinny object and we run to it. Needless to say many first time home buyers have been able to grow their credit and raise their families with the help off a FHA loan.

  Now, on average first time home buyers sell within their first 5 years of ownership so if their is a leason to be learned hopefully it is learned. I understand it is frustrating seeing everything your losing in the end by going with an FHA loan however you can't make it sound like a Ponzy sceme :/ If you took away FHA loan I'm sure our market would crash considering the lack of available buyers. If you were to highlight the old balloon payment,etc I would be on board yet with FHA many feel as though it is worth the scarifice to purchase in today's market.

Ps. Yes, insurance is higher on an FHA loan because of two factors. Typically credit scores are weaker and income levels tend to be lower.
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July 16 2013
Profile picture for szymon tylka
FHA loans... the great American scam #2
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December 11 2013
Profile picture for sunnyview
Why do you feel that FHA is a scam? Many first time or low down payment buyers could not buy at all without it.
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December 11 2013
 
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