• Shannon

A Bunch of Sheep

I like to read real estate blogs.

Wow. That almost sounds like one of those 12-Step admissions: “Hi, I’m Shannon, and I’m a real estate blog reader.”

What I’ve learned over the past few weeks by indulging in my “addiction,” however, only reinforces my belief that most real estate agents are sheep. Ah, come on – I used to be one – don’t take it personally.

Did you know that sheep will follow one another to slaughter? If one sheep falls of a cliff, the others will follow. They learn this behavior as lambs and it remains throughout their lives.

What are you telling your clients about the new change in FHA mortgage insurance premiums (MIP)?

Are you singing its praises and urging them to run out and get an FHA loan? If so, you aren’t alone. Agents across the country are heralding this change like it’s the best thing since the Internet.

Shame on you, if you are among them, because it makes you a sheep – blindly following the pack over the cliff, never once stopping to consider that you may be going the wrong way.

Think about this: where did you get your information about the cut in FHA’s mortgage insurance? From the media, right? This is the same media that tells America that winter is a lousy time to sell a house when, in reality, it’s the best time.

This is the same media that dictates to consumers that it’s either a great time or a lousy time to buy a home. Yet YOU listen to them and, worse, parrot their message to your clients.

The truth is, the FHA loan, despite this paltry cut in premiums, is still not a good deal for most buyers, and here’s why: no matter how much they cut the premium, FHA borrowers are still stuck with MIP for the life of the loan.

If they take out a conventional loan, on the other hand, they can waive their mortgage insurance when their principal balance falls to 80 percent of the original value of the home.

That gives a conventional loan a distinctive advantage over an FHA-backed loan.

Jack Guttenberg, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania crunched some numbers at HuffingtonPost.com and found the following:

“On both the $200,000 loan and the $400,000 loan, the cost of the FHA was significantly higher than that of the conventional in all 36 comparisons,” he writes.

“This conclusion would hold for loan amounts up to $417,000. Prospective borrowers can safely assume that for loans up to $417,000, they are better off with the conventional than with the FHA.”

In this scenario, he compares the costs using four LTVs: 80 percent, 85 percent, 90 percent and 95 percent. He also used three credit scores: 640, 740 and 800 and three periods: five, 10 and 15 years.

So, the next time your clients mention an FHA loan, ask if they’ve sought qualification for a conventional loan. If they have, and they’ve qualified, counsel them to talk to their lender about the savings they might realize if they go conventional vs. FHA.

Otherwise, just say "bahhhhh."

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