How should FHA loans fit in your pipeline?

by David Kitai10 Dec 2020

Bishoi Nageh loves FHA loans. The president of Petra Cephas Residential Mortgage Brokers in New Jersey does around 50% of his business in the government-backed products. Despite what he sees as negative stigma around the product he uses FHA loans to secure a home for people who, otherwise, couldn’t access one.

These loans, he explained, are a tool in any originator’s toolkit. While they come with some additional challenges, they can prove to be crucial for building up a business and generating longstanding relationships with homeowners who might gradually move from FHA to conventional products as they settle into their homes and build up their credit scores. Nageh and Sean Grapevine, owner and loan officer at ATL mortgage in Georgia, each explained how they use the products, whether they’re useful for reaching the millennial market, and shared how they think other originators can use FHA loans to their own and their clients’ benefits.

“As a loan officer, if you're in a position where this is the only way the client qualifies is via an FHA, it’s the right tool,” Nageh said. “Number one, you're making a deal work that wouldn't have worked any other way. Number two, this is repeat business. Because once they get themselves in a better position, they can go conventional.”

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Nageh warned of what he calls the “dirty PMI” that comes with FHA loans at rates far closer to 1% than what conventional loans carry. Because the primary determining factor for choosing an FHA loan over conventional is credit score, he said the PMI can be a great way of nudging your client to qualify for that conventional loan when they refinance or move.

For all his fondness for FHA loans, he hasn’t seen them come in that handy with many of his millennial prospects. Noting that members of the generation seems to be more focused on their credit scores, Nageh said that most of the millennials he sees qualify for conventional loans. Occasionally he’ll deal with a millennial buyer with good income and some heavy student loan debt, but the widely touted benefits of FHAs for millennials haven’t manifested in his practice.

At ATL mortgage in Atlanta, Sean Grapevine has seen the gulf between conventional and FHA loans narrow in recent times. Rates are comparable between FHA and conventional products, and with Fannie and Freddie lowering credit score requirements and putting 3% minimum down Grapevine leaves the FHA or Conventional decision to credit score.

Unlike Nageh, however, he sees less FHA borrowers moving on to conventional. It’s been his experience that FHA borrowers tend to stay in that bucket. Nevertheless, he sees opportunity for originators in the FHA space because, simply the deal is too good right now.

“In a low rate environment the additional costs of FHA right now are still less than, than your 780 credit score for conventional loans a year ago,” Grapevine said.

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Nageh sees similar opportunity for FHA borrowers in this low-rate environment, having recently put one client with a 680 FICO score and 3.5% down in an FHA loan at 2.5%. He stressed, overall, that loan officers and originators looking to take advantage of this opportunity and qualify people who might not otherwise qualify, they should look first to credit score and second to their own governing ethics. If those fit with the client, this could very much be the right tool.

“Generally speaking as any loan officer should just make sure that they're not putting their clients in something they can't handle,” Nageh said. “FHA puts that more on the radar for you because you're getting people into homes with a 55, 53, 56 back end ratio.”