Monday, June 23, 2008

Rates and Points of FHA Mortgages Versus Conventional Mortgages

What are the rules for FHA mortgages with respect to charging and setting interest rates and points on first lien owner occupied mortgages?

How does the FHA regulations prevent the FHA mortgage from having super high APRs like you find with subprime conventional mortgages?

While 30% of conventional mortgages showed high interest rate spreads, less than 5% of FHA mortgages had reportable interest rate spreads in the 2006 HMDA data.

There are a number of reasons for higher interest rates spreads on conventional loans versus FHA.

As for FHA, the loan origination is limited to 1%, but that is not the sole reason. FHA does owner occupied full doc loans only and does not have a rate adjustment for high loan to values or cashout.

Conventional on the other hand has a lot of different programs that have point cost. Examples are:

Cash out can cost as much as 2.5 Points
Loan to values exceeding 95% Cost 1.75 Points
Interest only Options cost as much as 2. Points
Subordinate Financing can cost as much as 1.5%
Stated Income cost additional Points

Those are just some of the reasons for the APR range on Conventional speaking from a Fannie Mae or Freddie Mac standpoint.

Subprime are conventional loans.

Hope this helps,


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