Mortgage Talk - FHA Loans Allow for The American Dream not The Impossible Dream

Down payments can be as low as 3.5%...
Frank Merola talks about FHA loans

FHA home loans can be a great loan option for a first-time buyer and popular with repeat buyers alike.

This loan is popular because buyers can make a down payments as low as 3.5%.  

The low down-payment benefits many home buyers who don't have a lot of money saved up for a down payment, or buyers who would rather keep money on hand for repairs, moving expenses or other needs. On a $400,000 house that means an FHA buyer can put $14,000 down verses $80,000 on a 20% down loan product.

FHA is also very lenient when it comes to gifts for the down payment and will allow 100% of gifted funds. Your entire 3.5% can come from a gift from a relative or local home assistance program or employer (check with your mortgage professional on the latter two categories).

The next reason we are seeing a lot of FHA loans is that they offer somewhat looser underwriting guidelines when it comes to a previous “derogatory event.”  In other words, if a buyer has had a foreclosure, short sale or personal bankruptcy the FHA waiting period is usually much lower than trying to get a conforming loan.

You can qualify for FHA loans two years after Chapter 7 bankruptcy and three years after a foreclosure, provided you’ve had no negative credit events post derogatory event. Most conforming loans make you wait 4 years after a bankruptcy and 7 years after a foreclosure.

The other very attractive feature of the FHA mortgage is that interest rates are usually lower than comparable conventional rates, this is especially valuable in our current rising mortgage rate environment.

When it comes to credit scores, FHA loans continue to offer a way for people with modest credit to buy a home. If your FICO scores are 620 and above you will typically have your pick of FHA products and lenders. If your FICO is between 580-620 you will want to check with your mortgage banker as to what requirements or lender overlays you will need to meet to still qualify.

FHA is also a great loan program to maximize your borrowing ability with regards to debt to income. Most conforming loan programs restrict total debt to income to 43%. FHA will allow a ratio as high as 50% and in some cases even higher with compensating factors. Oftentimes this means FHA allows a higher pre-approval which is valuable in today’s environment of ever increasing home prices.

Some other cool features of FHA loans are that they allow a Streamline Refinance program, they offer a “203K” renovation / rehab loan if you want to buy a “fixer-upper” and you can purchase a 1-4 unit property.

When you take out a FHA loan you are required to pay an upfront mortgage insurance premium (MIP) at closing and you will also carry an ongoing monthly insurance premium (PMI).

No single mortgage program is best for all homebuyers, so it's smart to compare. If you have questions about FHA financing please reach out to me via phone, text or email.


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