For a borrower that may not have the credit scores to qualify for a conventional loan or have saved enough down payment money for a conventional mortgage this loan may be the ticket to home ownership. Let's reveiew the characteristics of the FHA loan:
-Credit scores may be significantly lower with the FHA loan. The sweet spot for FHA is 640-679 but there are lenders that will accept FHA loans down to 580. At a 580 there have to be compensatory factors such as a larger down payment, excellent job history, a history of savings etc. but suffice it to say, FHA is a bigger box credit wise.
-Down payment requirements are lower than conventional lending. FHA requires a 3.5% investment. This down payment may be gift funds from a family member-so the borrower can get help from mom and dad if necessary.
-Job time is less stringent that a conventional mortgage. While FHA requires employment history, if a borrower has changed jobs or just obtained a new job after being unemployed for a period of time, FHA will close on a mortgage after 30 days on the new job assuming all probationary periods have been met. Keep in mind there will need to be previous employment or education history required.
-Interest rates are usually lower than conventional rates-sometimes as much as half a percent.
-Loan terms come in the 30 and 15 year fixed rate variety as well as adjustable rate products.
What are the down sides of this loan you ask?
There must be some, right? This loan is administrated by a government agency. The down sides aren't the kind that you would think of when dealing with a bureaucracy. For instance-the loan closes in about the same time frame as any other loan. There is no sign off by a government agency. HUD has decided that mortgage lenders are perfectly capable of underwriting to HUD standards. So if you want to consider downsides let's try these on for size:
-Higher mortgage insurance. FHA took quite a hit during the housing downturn. And in order to survive, mortgage insurance on FHA loans increased significantly. FHA has always had a mortgage insurance up-front factor that rolled into the total loan amount-it still does-1.75% of the loan amount. FHA also has a monthly factor of 1.350% which is roughly double the mortgage insurance on a conventional loan. But the real kicker is that the mortgage insurance never drops off the loan unless a 10% down payment is used. So that is one thing to consider. But-if you need the lower down payment and your credit scores put you squarely in FHA land, it is still a great loan.
-Condition of the property. I don't really consider this a negative. Property condition is being scrutinized by every type of loan. With FHA there is a HUD checklist that is used by the appraiser to determine whether or not the property meets minimum condition standards. Such things as roof life, 100 AMP electrical service, no plumbing leaks etc. are considered and noted to be repaired prior to a loan being closed if satisfactory conditions are not present. These are all items that most buyers would want in working order to purchase a home anyway, so I don't think this is cause for rejecting the use of the loan.
A couple other things about FHA that are worth noting: FHA does have several rehabilitation products if one uses the loan to purchase a home that is in disrepair. Keep in mind that not every lender has these products and the loan products themselves have their own set of rules. But if you have the stomach for repair and upgrading and want instant equity you might look into the 203K streamline, or the $5000 limited repair loan. If you do have a taste for regulation you can try the full blown 203K loan that allows up to $50,000 for repairs.
And HUD offers buyers who wish to live in a property first choice on the purchase of their repossessions-in specific instances HUD offers a $100 down program. That $100 down loan program can be used with the FHA 203K streamline repair loan to get into a primary residence for very little cost and repair the property as well. Can't beat that-even with a big stick.
FHA also allows a non occupying co-borrower loan for parents who want to assist their children in their first home purchase if the child doesn't yet have the income to afford the mortgage on their own.Or it can work in reverse-a child can assist a parent who is on limited income buy that way as well.
And finally-if you have ever wanted to be a landlord FHA will allow the purchase of up to a four unit property as long as the home owner lives in one of the units. So a buyer can purchase a property that will pay the mortgage.
In many, many ways, the FHA mortgage loan is a great loan product with an enormous amount of flexibility. It is a government program at its finest.
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