In good times and in tough times, FHA has for generations provided an alternative for the average American to achieve the American Dream of Homeownership. For years, FHA has been a standard tool for first time buyers, immigrants and those with credit and other qualification issues.
During the real estate and subprime boom of the previous decade, FHA financing shrunk from over 25% of the loans in America to well under 5% of the market. As subprime alternatives disappeared, the government moved to make FHA more attractive, including lowering the cost of required mortgage insurance.
Here are some of the advantages of FHA financing for homes-
A Low Down Payment. Generally, the down payment on an FHA mortgage is very affordable as compared to conventional financing. The down payment required is 3.5% of the sales price and the seller is allowed to pay up to 6% of the closing costs.
A Liberal Gift Policy. FHA borrowers can obtain the down payment and closing costs completely through a gift provided by an immediate relative. Many conventional alternatives require that a certain amount of the borrower’s funds belong to the borrower through savings amassed some time before the transaction takes place. FHA also requires no cash reserves left in the bank after settlement for most borrowers. Keep in mind that prudent underwriting standards may very well require savings and cash reserves after closing.
More Lenient Qualification Standards. FHA requires less income to qualify for a mortgage. The standards allow a housing payment which is 31% of a borrower’s gross monthly income and total debt service which is 43% of a borrower’s gross monthly income. By contrast, most conventional programs have ratios of 28% and 36% – though both programs allow “stretching of ratios” for stronger borrowers. FHA also allows a prospective borrower who does not qualify to add a related co-borrower to the application–and this co-borrower does not have to live in the home.
FHA also does not require a minimum credit score to qualify for a mortgage and there is a very liberal standard for those who are making a minimum down payment. It should also be noted that many lenders that purchase or make FHA loans do have minimum credit score standards and FHA requires a down payment of 10% if the credit score is below 580.
FHA ARM Program. The FHA adjustable mortgage programs are very popular because annual adjustments are limited to one percent each year, as compared to most conventional adjustables which have caps of two percent each year. For example, this means that the 3/1 adjustable can only increase one percent at the start of the 4th year. Also, the lifetime cap on these FHA adjustables is five percent, while most conventional alternatives have a six percent limit. For longer term ARMs, the annual cap may be 2.0%.
FHA Loans Are Assumable. FHA remains as one of the few programs to allow assumption of adjustable and fixed rate mortgages at the same rate and term as the original loan. This is a major advantage when you are trying to sell your home in a high-rate environment. Note that the assumption must be accomplished by an owner-occupant that is credit-qualified.
FHA Has No Maximum Income Limits. Though FHA loans are limited as to a maximum loan amount, there is no maximum income limitation. Many conventional first time buyer programs that allow a minimum down payment, also limit the maximum income level of the borrower.
FHA also has programs to help homeowners improve their properties (rehabilitation), refinance their present mortgage and even reverse mortgages for seniors. Put it all together and you have a program that packs a lot of punch with first-time homebuyer’s or other low-to-moderate income Americans. If you are in the market to purchase a home or refinance your present home, you should look seriously at an FHA mortgage as an alternative. Contact us if you would like more information on whether FHA might be the right option for you.
