FHA loans have gotten a bad rap in the last few years. Here is the Granddaddy truth about FHA loans, you should really consider if you are looking for mortgage options!
FHA loans are another option you can take as a borrower, to help you accomplish your financial goal. The Federal Housing Administration ensures the loan to the lender, in case of payment default. FHA loans contain a bad rap because they are difficult to get and expensive. Here’s what you should consider:
FHA loans are expensive
Reality: FHA loans are expensive to the degree in which you are comparing a FHA loan to a Conventional loan, and your credit score is under 680, the Conventional Mortgage counterpart is going to be very expensive. Especially if you are working with little equity. FHA loans contain two forms of mortgage insurance. They also contain an Upfront Mortgage Insurance Premium down as a US MIP, which is based on 1.75% of the loan amount. Then there is a Monthly Mortgage Insurance Premium, which is based on 85% of the loan amount. This goes into your taxes and insurance bill on your mortgage payment. The Upfront Mortgage Insurance Premium has been financed into the loan, over the term of the loan. For example: 360 months represents a 30 Year Fixed Rate Mortgage.
FHA loans are hard to get
Reality: Not so much anymore. The Federal Housing Administration is concerned about the type of property they are loaning on. More specifically about health and safety concerns. This means if the property you are looking at purchasing has anything too extreme (for example: the deck is falling apart or at the end of its economic life, a roof in dire straits, paint chipping on the side of the home or exposed wiring) the appraiser is required to call it out. They call out these things to be fixed prior to closing. One such requirement is that if the repairs to the property are too extreme and the buyer decides to back out, a copy of the appraisal is put on FHA’s website and sticks with the property for six months.
The mortgage insurance on FHA loans is permanent
Reality: Yes, and no. If you are purchasing a home or refinancing the home with less than 10% equity, using a FHA mortgage, the monthly mortgage insurance is indeed permanent. Selling the home or refinancing would be the two options to drop the mortgage insurance payment. Alternatively, if you are putting down 10% equity, or more, the mortgage insurance is dischargeable after 120-months and 20% equity. It does not matter if you have a 50% down payment, the 120-month rule still applies.
Here are some reasons to consider why a FHA mortgage might still make financial sense. FHA loans are really the only other bucket available for purchasing or refinancing a home with little equity and less than perfect credit. FHA loans are flexible in regards to payment and income ratios. Going as high as 55% in some cases. Here are some things about FHA loans that can make them very attractive.
A door opener – A FHA loan is a very viable choice to getting your foot in the door to purchase a home. The program does require documentation and the lender is required to show your ability to repay. In other words, the lender is not giving you a loan you cannot afford. While this remains, you should always take on a mortgage payment that will still allow you to save and budget for other monthly expenses. The FHA 30-Year Fixed rate can open the door, and as the borrower’s income and finances change over time, the borrower can refinance into a Conventional loan. Doing so would drop the mortgage insurance, saving substantial monthly dollars.
Paying off consumer debt – The FHA loan is the only loan that will do Cash-Out Refinancing, up to 85% of the value of your home, for any reason you wish. A smart move might be to consider paying off high interest rate credit cards, personal loans or installment debt. Also, wrapping that into a 30-Year Deductible Mortgage, freeing up extra money that you can take and put into savings. Such a scenario could also drive up your credit score, especially if you are paying off credit card debt. As your utilization of credit rate drops, your credit score will rise, potentially allowing you to move into a Conventional mortgage without PMI. Perhaps within a matter of as little as six months.
FHA loans can make you more credit worthy – Let’s say you have a first and second mortgage. You can combine a first and second mortgage up to 97% Loan to Value using a FHA mortgage. This puts you into a better credit worthy position. Here is why: If you ever pay off the second mortgage, which you did not use to acquire the house (meaning it was not purchase money debt), any other loan program is going to require the transaction to be set up as Cash-Out. This has a higher credit score requirement and a higher equity position requirement. FHA does not have such rules and subsequently could help you roll a first and second mortgage, combining them into one, far easier.
No down payment and low down payments – You are hearing that correct. If you are eligible, you might be able to apply for Down Payment Assistance using a FHA 30-Year Fixed Rate Mortgage. This would mean you have absolutely no down payment of any kind. Alternatively, FHA requires a down payment of 3.5%. Check with your lender. For example: The State of California offers a grant of up to 5% of your loan amount to go towards your down payment.
FHA loans can make financial sense for the right type of borrower in a specific situation. They have the most flexibility in terms of payments, and the rates on FHA loans are typically about .375% lower than Conventional Mortgages. Talk to a qualified mortgage adviser, who can clearly and accurately articulate which FHA loan may be a beneficial choice for you.
Looking to purchase a home? Get started by getting a free mortgage rate quote online today.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.