Loan Modification

Fannie Mae Flex 97 is gone; FHA loans become more attractive

By Gina Pogol

A few months ago I wrote a post advising consumers to compare the Fannie Mae Flex 97% loan with FHA’s product because in many cases it was the better deal, especially once FHA increased its mortgage insurance premiums. Today, however, Fannie Mae no longer supports the Flex 97 product. Instead, they will offer a standard mortgage at 97% loan-to-value with all the loan level pricing adjustments they can slap on a mortgage.

Fannie / Freddie 97% versus FHA

The credit score minimum for FHA loans with 3.5% down is 580, with many lenders imposing a 620 or 640 score.  Fannie Mae requires a minimum credit score of 620 for loans with loans exceeding 95% of the property value and imposes a 3 percent surcharge for credit scores of less than 640. In addition, those applying for these mortgages must be able to get approved for mortgage insurance. Genworth, one of the larger mortgage insurers out there, won’t consider insuring a mortgage over 95% loan-to-value if your credit score is less than 720 and it won’t insure mortgages high-LTV loans in AZ, CA, FL and NV under any circumstances.

Fannie has made one positive change, however — it does allow you to use gift funds as your entire down payment. It has also changed its underwriting to put more emphasis on income and less on assets, so in some cases you may be able to get approved for a Fannie Mae loan more easily than an FHA mortgage and vice versa. In general, however, FHA financing is both easier to secure and less costly.

Compare options

Recent studies from several sources have discovered that the majority of applicants looking for mortgages don’t shop as much as they should (over half did not shop AT ALL!). And getting the lowest rate is not your only consideration. When shopping for a home loan, compare several programs, including FHA and conventional offerings before deciding on your program. Differences in mortgage insurance premiums can really affect the cost of your loan.

Full post as published by FHA Mortgage Guide on December 21, 2010 (boomark / email).