Loan Modification

Two Rates For FHA Loans?

By Peter G. Miller

Each year at this time the very smart — and very rich — Warren Buffett issues a letter to shareholders of the company he heads, Berkshire Hathaway.

Berkshire Hathway owns Clayton Homes, what Buffett describes as “the country?s leading producer of modular and manufactured homes.” Or, what many people call mobile homes.

In discussing Clayton in this year’s letter to shareholders, Buffett says there’s a “punitive differential in mortgage rates between factory-built homes and site-built homes. Before you read further, let me
underscore the obvious: Berkshire has a dog in this fight, and you should therefore assess the commentary that follows with special care. That warning made, however, let me explain why the rate differential causes problems for both large numbers of lower-income Americans and Clayton.

Rate Differentials

“The residential mortgage market is shaped by government rules that are expressed by FHA, Freddie Mac and Fannie Mae. Their lending standards are all-powerful because the mortgages they insure can typically be securitized and turned into what, in effect, is an obligation of the U.S. government. Currently buyers of conventional site-built homes who qualify for these guarantees can obtain a 30-year loan at about 5 1?4%. In addition, these are mortgages that have recently been purchased in massive amounts by the Federal Reserve, an action that also helped to keep rates at bargain-basement levels.

“In contrast, very few factory-built homes qualify for agency-insured mortgages. Therefore, a
meritorious buyer of a factory-built home must pay about 9% on his loan. For the all-cash buyer, Clayton?s homes offer terrific value. If the buyer needs mortgage financing, however — and, of course, most buyers do — the difference in financing costs too often negates the attractive price of a factory-built home.”

Title 1

In fact there are FHA mortgages for manufactured homes, but not the same loans which are available for traditional houses. If you have a typical house you get financing insured under the FHA’s 203(b) program, if you have a mobile home you can get financing backed under the Title 1 program.

“A Title I loan,” says HUD, “may be used for the purchase or refinancing of a manufactured home, a developed lot on which to place a manufactured home, or a manufactured home and lot in combination. The home must be used as the principal residence of the borrower.”

But Buffett is right, the rates for traditional FHA loans and Title I financing are very different. Why? Traditional FHA loans are secured by a property and its improvements — the house. Title 1 loans are secured in whole or in part by a mobile home, something which is likely to depreciate like an aging Hummer.

Given the differences between traditional homes and mobile houses, the differential in the interest rates is not surprising. However, what could help lower monthly costs would be to extend Title 1 loan terms to 30 years from today’s maximum of 25 years.

If you have or are considering a manufactured home, take a look at the Title 1 program available through FHA mortgage lenders.

Full post as published by FHA Mortgage Guide on March 01, 2010 (boomark / email).