When exploring your options for financing today, I believe everyone should at least consider an FHA Mortgage. Today, I want to tell you why:
1. Loan Amounts
The loan amounts available (especially in High Cost Areas, like mine) are on a par with Conventional Financing. In the past, FHA programs were typically only made available to the more low-to-moderate housing price ranges. Now, practically every community can enjoy the benefits of FHA financing.
2. Old Stigmas Are No Longer True
It used to be that “FHA takes Longer” or “FHA loans are more expensive” or “FHA has tougher appraisal guidelines”. Over the past few years, FHA has given more and more responsibility to its Direct Endorsed Lenders in the underwriting arena. Additionally, the Secondary Market has worked to price Mortgage Backed Securities for FHA loans more aggressively. There is now little difference in turnaround times, pricing, and appraisal issues between FHA and any other loan product.
3. Minimum Down Payment
On FHA loans, you can still put as little as 3.5% down. Conventionally, even the 5% minimum down is very difficult to obtain without pristine credit and strong liquid reserves….more often than not, you need 10% down on most conventional loan products. This is a huge consideration for first time buyers (who struggle with savings) and move up buyers (who have lost much of their equity over the past few years).
4. Source of funds
While the FHA does require a minimum investment by the Buyer of 3.5%, all of those funds can be gift monies from a family member. There are many potential home buyers who are unaware of this niche in FHA lending that can help people with sufficient credit and income, but limited cash accumulated, who have relatives looking to help them become homeowners.
5. For now at least, a 6% Seller’s Concession
With so much available inventory, home sellers are more likely to structure transactions wherein they (the seller) will pay the closing costs and/or pre-paid expenses (like tax and insurance escrows) on behalf of the buyer. The ability to reduce or even eliminate closing costs for a buyer is a terrific incentive for the buyer to choose one house over another. Once again, less cash needed to close is a good thing! FHA has proposed lowering the amount for sellers to pay from 6% to 3% (a BAD idea), but, for now, 6% is the most liberal sales concession in the market.
6. Leniency of Credit and Income Standards
In so far as the FHA is really a Federal Insurance Program that insures lenders in case of borrower default, the Program gives approved lenders the flexibility to make more common-sense underwriting decisions. Historically, lenders are more understanding of past credit challenges and more aggressive in income ratios because the loans are insured by Uncle Sam which, in turn, helps get more borrowers approved.
7. FHA Loans Are Assumable
Five to seven years from now, when a home buyer is looking to become a home seller, nearly every expert in the world envisions higher (more “normal”) interest rates of 6.5%-7.5%. An often overlooked feature of FHA loans is the fact that a new buyer can take over the seller’s loan at the seller’s interest rate (assuming they qualify based on their income, assets, and credit). What that means is, if you close today on an FHA loan at 3.5 to 4%, you can sell your home with a 3.5% to 4% mortgage, while your “competition” of home sellers will be handicapped with higher rates. That factor alone could make your home 5-15% more valuable (because home buyers buy more on monthly payment than they do on sales price).
I hope I opened your eyes today to some other things to consider when choosing your mortgage. Now, FHA is not a perfect loan for everyone (largely due to the costs of the FHA insurance premiums); however, it is a great vehicle for many home buyers.