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The FHA Scam

Writer's picture: Jesse BrewerJesse Brewer

So a lot of people think that FHA (First Time Home Buyers Assistance) loans are a good thing for the American people, and on the surface, that assumption would be right; however, if you start to look at what is all involved with FHA loans and what the fees are, you may soon realize just how screwed the American people are when they take these loans.  



Take a $100,000 home loan, for example, and I’m using that to keep math simple for this exercise.  If a person is going to use an FHA loan, they will need a down payment of 3.5% (in this case, $3,500), leaving the amount they are borrowing at $96,500.  This is important as this is where people start to really get screwed and not even realize it.  If you are using an FHA loan, you must purchase Mortgage Insurance Protection (commonly referred to as MIP) on the amount you are borrowing.  So, for this case, if they are borrowing $96,500, their upfront cost of MIP is $1,688.75, which is just under half of the down payment.   Secondly, you must pay an MIP premium over the life of the loan of .85% a year.  So, with this loan, it calculates out to $820.25 per year, or when you break it down a month, that’s an additional $68.35 per month, and this is all because you utilized the “FHA” loan product.   So, year one additional cost for this loan product is $2,509.50, and remember, this is on a $100,000 home.  There are a lot of people who stretch this limit and purchase homes well over $200,000 using FHA, so this cost can easily double, and let’s not forget that these monthly premiums will never go away if you amass enough equity in your home, no they are there the life of the loan so you have to refinance (paying more loan cost for a new loan) or sell the home to get rid of them. 



Most people do not know that conventional loan products are available with just 3% down.  The difference is you must have a 660 credit score to use instead of a 620.  The advantages are the MIP cost is considerably lower (less than 50%), and once you have 22% equity in your home, they will take the MIP off at no charge.    So, my advice is if you want to buy a home, don’t rush out and use an FHA loan, work on your credit, be smart, and get a better and more affordable loan product.

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