Many applicants call us thinking that the HomePath loan program has a better rate than FHA. As you know the rate is higher.
The main benefits of HomePath are no appraisal requirement, no required repairs (unless home requires a HomePath Renovation Loan), low down payment, and more flexible guidelines with underwriting.
HomePath offer a lower down payment (3.0% vs 3.5% for FHA). However HomePath has a higher rate when only placing the minimum 3.0% down payment.
The higher rate is how Fannie Mae "self insures" the mortgage insurance risk....by not requiring mortgage insurance. Fannie Mae increases the rate when someone puts less than 20% down under HomePath. For example, today's HomePath rate with 20% down is 4.875%. This is compared to 5.875% with only 3.0% down payment. Essentially the "no mortgage insurance" is via a higher rate.
The enclosed analysis helps shed light. The down payments are both assumed to be 3.5% (although HomePath only requires 3.0%) The closing cost under FHA is the upfront mortgage insurance premium (FHA mortgage insurance is 2.25% added to loan amount + .55% yearly premium). The example assumes all other closing cost are paid by the seller except the upfront mortgage insurance.
Please see the FHA loan balance starts off higher than HomePath.
The first section in the report shows the FHA loan with a 5.0% interest rate and mortgage insurance has a slightly higher payment than a HomePath loan at an interest rate of 5.875% with no mortgage insurance.
The second section compares both loans after five years. The FHA loan has paid less interest (cost) than the HomePath, but still has a higher remaining loan balance due to the "financed mortgage insurance". Thus after five years the programs are about ~even in benefit.
Section three compares each loan after ten and fifteen years. In this section you begin to see the advantage of FHA over HomePath. The obvious point here is the average homeowner is only in the loan or home 4-7 years.
HomePath is a great program and Fannie Mae is more accepting of contracts that are using HomePath loans as the FHA appraisers may not pass the HomePath homes.
I am available to meet with agents and present this if you think helpful.
Lucey Mortgage Corporation
861 Coleman Blvd.
Mount Pleasant, SC 29464
Over 1 Billion Dollars in Closed Loans
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