Foreclosure Rate Comparison: FHA Loans vs Conventional Loans

by Tim Krulia – Private Money Blueprint CFO

As part of our quest here at PMBP to give you the single best resource on the financial aspects of growing your real estate investing business (aka, we help people find private money quickly, easily, and abundantly)… here’s a video I found that compares the foreclosure rates of FHA loans and conventional loans.

Clark Howard is a famous consumer advocate who basically gives people great tips about how to spend or not spend their money.  This video is from Howard’s HLN TV show that aired a few days ago. Go ahead and check out the short video and come back to read the rest of the article here.

Back in my college years I worked at one of the Mid-West’s largest mortgage lenders.  This bank has a strong ethical reputation and is still doing great business today.  My job was mostly funding conventional and FHA loans.  By far most of the loans I worked on were “A paper” conventional loans, but there was the occasional FHA deal that popped up.

This was at the time that Sub-Prime loans were starting to get really ramped up.  One big difference between FHA loans and Sub-Prime was that FHA’s interest rates were most of the time WAY better for the borrower even though they both would approve borrowers with bad credit scores.

Where an average Sub-Prime 2 year ARM was starting at say 8 – 10%, FHA may have been close to half that rate!  If you had low credit scores and didn’t have much down payment $ to drop on the purchase of a house the decision was obvious; try for an FHA first.

Of the tens of dozens of FHA loans I worked on I remember seeing one closed FHA loan where the borrower’s middle credit score was in the mid 400s!  Don’t ask me how.  Yeah, I did a double take on that one and quite a few others.  The thing is though; there were lots of FHA loans that came though that had really low credit scores.

To comment on Clark Howard’s video, I’m not very surprised that FHA loans have gone to foreclosure in greater proportion than conventional loans.  It just makes complete sense because there were lots of REALLY low credit scores that were approved by FHA that probably wouldn’t have ever made it through as a conventional loan.

The great comment that Clark made is that he touches on FHA homeowner assistance or relief.  So if a borrower is having trouble making on-time payments, they can apply for help.  There is still a process of applying for assistance and as Clark says it may be getting easier to be given help, but it’s not automatic.

I don’t know to what extent it may be but there’s undoubtedly a red tape process to go though with FHA before MAYBE getting some help.

Here’s an interesting perspective on FHA, conventional & Sub-Prime.  Private money recruiters don’t need any of those options to begin with so let’s not worry so much about how to get FHA homeowner relief or a conventional loan modification.  I’d really enjoy seeing the statistic of how many private money “mortgages” went into foreclosure compared to FHA, conventional or Sub-Prime.  My guess is that private money loan defaults are a fraction of these other types of loans for one very simple reason; flexibility of terms.

If circumstances change for the worse and the private money borrower can’t fulfill the repayment obligation, the borrower and lender could probably just change the repayment terms.  That could potentially be as easy as making a single phone call!

Some banks will do modifications under somewhat peculiar terms for only people that fit into a certain shaped box.  It might just be staggering to see how much less private money lending may have vs. traditional lending of experiencing payment delinquency or foreclosure.  All that boils down to is that if our assumptions are true than, private money lending is LESS RISKY.

Again, I don’t have the stats to back up my estimation so if anyone has ever seen that statistic, please share it with me so we can share it with the community!  Man, it would sure be a great selling point when you’re out there recruiting private dough!  Wouldn’t it?