FHA: F'in Hit that Ass

Not hard, but seriously, it won't move and I've got places to be.

Also, I enjoy wacky acronyms.

Recently I've discovered that, besides being set adrift in the middle of the ocean, finding a home loan to fit your needs really drives home where your place is in the world.

Pictured: The majority's place in the world.
Also, those aren't rocks...

If you're like most Americans, you're one paycheck and a car breakdown away from financial ruin.
i.e "normal".
Take a minute to bask in the comforting warmth of monetary mediocrity...
Feels kind of like cheap beer and stale pee doesn't it?
No?
Ah, nevermind then..

By the way, ever notice how all beer is "premium"?

Anyway, after my recent mucking about in the realm of mortgage lending I've discovered two things:

I'm poor, and I've got a sexy, sexy credit score.

Also rhyming skills... Sweet.

As a member of the working poor, I've fallen into a certain profile type. The kind of profile that the Federal Housing Administration is all about.

Yeah, baby..

If you're not a server, stripper, or drug dealer on the side, your liquidity isn't exactly liquid. That is, the penny rolling begins in earnest on the second Wednesday after payday.

Only a few more and I can afford to do laundry

Fortunately for most of us though, as long as certain broad criteria is met, the government will help set you up with a home loan.

Now it's not charity, nor is it "free" money. An FHA mortgage is basically the government vouching for you, (the home buyer), to the bank.

Gov: "Listen, we told the bank that you're cool.
But fuck this up and we will fucking sodomize you, your credit rating and your way of life.
Capeche?"

As long as some basic standards are met, the government will go to the bank and be all like:
"Ai, dis guy is all right. Whydunya help im out a little? Remember we's bailed ya out not too long ago. Yousguys kinda owes us."

That's how I imagine it happens anyway..

Of course the bank says "okay" but they make a condition of their own. They're not going to be left holding the bag if this schmuck home buyer decides to welch on the deal. So the bank agrees to supply the loan, as long as the government guarantees the bank will get their money back if the home buyer can't or won't make the payment. The government puts his arm around you, the home buyer, and says: "Sure, no problem. The kid's alright. I'll insure the money for up to 80% of the down payment."

Then you develop a cocaine habit, can't pay, and the government sends out the crazy, early 90's Joe Pesci to collect what's owed...

And for the love of God, don't laugh or tell him he's funny.

My imagination is occasionally a screwed up place...

In a nutshell though, that's what a FHA loan is. It's a loan insured by the government, which, depending on your credit rating, allows you to get away with paying as little as 3% down.

And despite my many gangster references, an FHA loan is the squeakiest of the squeaky clean when it comes to lending practices. Remember those "points" and charges from earlier? The FHA makes sure to limit the number of fees a lender can charge for a home purchase.

I guess you could call it an "anti-bullshit measure"

It's not all sunshine and lemon drops though. There is a limit to the amount of money you can get with an FHA loan. They'll take into account the location, cost of living, etc. But to make sure the program serves low to moderate income people, let's just say you won't be getting any $350,000 home loans in Port Huron, Michigan.

No.

 And remember that extra bit of insurance that guarantees the loan at a lower rate? The home buyer pays it. Generally it'll be bundled in neatly with the rest of the loan as part of the P.I.T.I (Principle, Interest, Taxes, and Insurance) and it's possible that you'll still be paying private insurance anyway.

This makes perfect sense if you've been paying attention.

 But in the end, if you don't have a lot of ready money, but have decent credit, plan on living in the house for a long time and aren't looking to purchase a chateau, then a FHA home loan is one of the best options out there.

Don't just take whatever loan you're handed first though. Make sure to shop around. FHA has to go through lenders, and all loan programs aren't created equal. I've gotten estimates from three different lenders and the interest rate fluctuates from 4.5% to 3.875%, back up to 4.25% and all the way down to 3.75%.

And keep tabs on that APR!

Seriously though, why didn't we have a class about this stuff in high school? A little less Greek mythology, a little more percentages.

Greek mythology = Orgies, bestiality, some guy discovering how to make fire.
Got it.

 Because, lets be honest, one is a lot more helpful than the other.

Mortgage industry dickery...continued...

For the record, I am well on my way to getting drunk.

The stupid amount of research and hostage taking that goes along with figuring out this mortgage thing is just more than I can take. If it weren't for the fact that it involves my money, I'd just do what I did in school and bullshit my way through the thing.
Unfortunately, that's not a viable option. And I apologize in advance for the dullness of this entry. To make up for it I plan on including pictures of adorable animals, as well as boobies and well-toned abs. Although you might want to bookmark this crap anyway just for it's own sake. It may help later.

Aaaaannnnddd, here we go!

So wee!

Over the past few weeks I've learned that it's a lot easier for me to come up with inappropriate acronyms for APR than to actually understand what it is.

Annoying Person Rant... Acute Paranoia Risk... Anal Penetration Rape...

Turns out it stands for the much more boring Annual Percentage Rate.
The APR as it pertains to mortgages is basically an estimate of what your loan will actually cost you on a monthly or yearly basis. It's not an exact science, but it is helpful when comparing mortgages.
For example:

Bank Slick approves you for a $100,000 mortgage at a 5% interest rate.

Bank Shady approves you for the same amount but at a 6% rate.

Seems like common sense to go with the first one, right?

Pictured: Lack of common sense.
Although that pic is pretty sweet..

Yeah, except that Bank Slick wants to charge a $2,000 origination fee and have you pay for three discount points at $1000 a pop. As opposed to Bank Shady charging a $500 origination fee and only asking for one discount point.

$5,000 vs. $1,500

Suddenly Slick doesn't seem like such a great deal, eh?

APR's are good in that they can take these things into account. This prevents bank's from advertising insanely low interest rates, but then tacking on a bunch of extra costs and fees which drive up the total cost of the loan.
There's also a ton of APR mortgage calculators out there to help you figure things out.
In a nutshell, APR is a more accurate, black and white, formula to compare mortgages.

And now.. kitties!

Not what I would have used for bra stuffing, but to each their own..

Okay, so we mentioned these "point" things a few moments ago. What the hell are those?

Discount points are a means for the buyer to lower, or buy down, the interest rate on their loan.
One discount point is generally worth 1% of the total loan. So with a $100,000 loan, the discount points are worth $1000 each.

Example: You have a $100,000 mortgage loan at a 5% interest rate. You buy two discount points for a total of $2,000. Assuming that each point lowers the interest by .25% you have now changed your interest rate to 4.5% for the life of your loan.

Discount points do pay off if you plan on staying in your house for a long time, and they're tax deductible, which is cool. But if you wind up moving only a few years after you buy, you won't see the savings.
Lenders love discount points because by receiving the cash up front, they don't have to wait on interest payments and it enhances their liquidity.

But what's the difference between buying discount points and just putting down a larger down payment?
I'll be happy to get into that. But first!

Rawr!

Both discount points and the down payment come out of your pocket immediately, so it's kind of hard to see the difference. But remember that discount points affect the rate of your mortgage, while a down payment affects the amount.
Rate vs. Amount

Stick with me here.

Your monthly mortgage payment is made up of three different components. Interest rate, loan amount, and term, (or length of your mortgage).

So, if you're staying in your home for a long time, buying points may be to your benefit as they lower the rates over the long term. If you'd like to buy more house, increasing your down payment will help to do that. It all depends on your situation. Although here's a point calculator to help figure things out.

Oh my god. So F#$%ing adorable. Also, thirsty.

Yeah, but there was also something about an origination fee, what's that?

An origination fee (sometimes called origination points, administrative fee, underwriting or processing fee), is the money the lender charges upfront for evaluating and preparing your mortgage loan. Generally used to pay for a credit report, attorney fees, document preparation costs, and notary fees.
Bullshit? Yes. But what else are you going to do? Pay for a house in full? HA!
Anyway, the origination fee is generally calculated into the percentage of the total loan, which brings us back to the APR.
Make sure you check that shit!
The interest rate isn't everything, comparing loan APRs is the best way to determine which is the better deal.

I bet they have the cutest adventures

 So, after you've crunched the numbers, determined which loan is best for you, made an offer on a property, negotiated until you hate life, get your offer accepted and do an all too short happy dance, there are then closing costs to consider.

To help deal with it, here's more adorableness...

*sigh*

A property transfer between owners and banks is a legal process. Which, not surprisingly involves lawyers, who need to charge a good chunk of money to pay back their law school loans.
I think you see where I'm going with this...

Closing costs are made up of three categories. The cost of getting the loan, the fees involved with transferring ownership, and the taxes paid to state and local governments.
Generally, you can expect closing costs to be anywhere from 3-6% of your total loan. However, a lot depends on your location and the real estate market. And the list of closing costs is just silly.
Of course you could get the seller to pay for the closing costs, but you may wind up paying more for the property than if you had just been able to pay those costs up front.

If I've learned anything from this foray into mortgage lending, it's that "location, location, location" coincides with "depends, depends, depends".

There's just no telling what your mortgage situation is until your location, income, and a million other little things are factored it. So bring a pad of paper, a calculator and don't feel bad about making your lender explain things two or more times. With both examples and pictures.

You're the one who's going to be living with whatever plan you decide.
So good luck, and wish me some as well..

And now, please enjoy a piglet in boots.

Wilbur!