Consider the flexibility of an FHA Loan to find out how!
For home buyers, FHA mortgages require a 3.5 percent downpayment with the fewest "strings" attached. This makes the FHA mortgage one of the most lenient mortgage types available nationwide.
I recently closed an FHA high balance purchase in Marin County for $647,000 – my clients only brought $23,000 to the close of escrow (3.5%). All their closing costs and prepaid finance charges were covered with lender rebate and a seller’s closing cost credit!
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This is a VERY common way to purchase a home as often buyers are light on down payment but have income to support a big purchase.
In Marin County the maximum FHA loan amount is $625,500 (about a $648,000 purchase price based on 3.5% down payment $22,680) on an owner occupied single family residence.
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In Sonoma County the maximum FHA loan amount is $520,950 (about a $539,800 purchase price based on 3.5% down payment $18,893) on an owner occupied single family residence.
The FHA loan is one of the misunderstood products in the market. For years, the FHA advertised its products as loans for people "on the margins". FHA loans remain among the most flexible and rewarding products available to today's U.S. home buyers.
There are 6 common misconceptions about the FHA mortgage, though, and these falsehoods could be standing between you and a bona fide FHA loan approval. Read more below.
Myth 1 : The FHA Is A Mortgage Lender
Fact : The FHA is not a mortgage lender. It's a mortgage insurer.
The acronym "FHA" stands for Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. The FHA doesn't make mortgage loans to home buyers or refinancing households. Rather, the FHA provide mortgage insurance to banks, credit unions, and other lenders which make loans meeting FHA insurance standards.
The FHA reimburses lenders for a portion of incurred losses in the event that their FHA-insured loans default, or go to short sale or foreclosure.
Myth 2 : FHA Loans Are For First-Time Buyers Only
Fact : FHA loans are not for first-time buyers only. FHA loans can be used by first-time buyers and repeat buyers alike.
The FHA loan is often marketed as a product for "first-time buyers" because of its low downpayment requirements. However, last decade, many U.S. homeowners have lost home equity in the housing market downturn. These repeat buyers may have little money for downpayment -- even after the sale of their former home.
The FHA will insure mortgages for any primary residence. You don't need to be a first-time buyer.
Myth 3 : FHA Loans Require 20 Percent Downpayment
Fact : FHA loans do not require a 20 percent downpayment. (see above in bold)
There are very few credit restrictions with the FHA loan and the agency allows your 3.5% downpayment to comes as a gift from a family member, employer, charitable organization or government home-buyer program. There are also no reserve requirements with FHA.
Other low-downpayment mortgage programs have eligibility requirements. The VA loan, for example, allows for 100% financing but you must be an eligible military borrower to use it.
The USDA Rural Development loan also allows 100% financing but the USDA program requires that your home be in a less-developed census tract; and that your household income is within certain limits.
Fannie Mae's former 3% downpayment program -- the Conventional 97 -- required higher credit scores than an FHA loan, and loan sizes were limited to $417,000.
Myth 4 : FHA Loans Require High Credit Scores
Fact : Lenders can approve FHA loans with no credit score whatsoever. My lender Stearns requires a credit score of 620.
FHA loans feature some of the flexible and forgiving credit standards of any available loan type. With an FHA-backed loan, perfect credit is not required, and mortgage lenders are expressly instructed to consider a borrower's complete credit history -- not just isolated instances of late payments here and there.
Since 2011, FHA mortgage rates have been lower than comparable conventional products.
Note that not everyone will qualify for an FHA home loan. Borrowers with a "banged-up" history, though, have a much better chance of getting loan approval via the FHA than other government agencies.
Even if you've been turned down for other types of credit, such as an auto loan, credit card or other home loan programs, an FHA-backed loan may open the door to homeownership for you.
Myth 5 : FHA Loans Are Expensive (this one is kinda true but if it gets you into a home sooner rather than later it may not be considered “expensive” afterall)
Fact : FHA loans can be more expensive, or less expensive, than other loan types. The long-term cost of an FHA loan depends on your loan size, your downpayment, and your location.
The biggest cost of an FHA home loan is usually not its mortgage rate -- FHA mortgage rates are often less than comparable conventional mortgage rates via Fannie Mae and Freddie Mac. The biggest cost is FHA mortgage insurance.
FHA mortgage insurance premiums (MIP) are payments made to the FHA to insure your loan against default. MIP is how the FHA collects "dues" to keep its program available to U.S homeowners at no cost to taxpayers.
MIP is paid in two parts. The first part is paid at closing and is known as Upfront MIP. Upfront MIP is automatically added to your loan balance by the FHA so no payment is required at settlement. Upfront MIP is 1.75% of the loan amount ($500,000 loan amount x 1.75% = $8,750) and is usually financed into the transaction.
The same is true for annual mortgage insurance premiums, which are paid in monthly installments along with your mortgage payment. Currently the annual mortgage insurance is 1.35% of the loan amount and added to the monthly payment ($500,000 loan amount x 1.35%/12 = $562.50).
As compared to conventional loans with less than 20% downpayment, FHA MIP is sometimes more costly and sometimes less so. Your loan officer can help you compare choices.
Myth 6 : All FHA Loans Are The Same
Fact : All FHA loans are not the same. There are many "types" of FHA loans, and mortgage rates vary by lender.
As an agency, the FHA publishes and maintains minimum eligibility requirements all of the loans it insures. However, FHA lenders enforce additional requirements on FHA loans, known as "investor overlays."
A sample of investor overlays includes raising the minimum FHA mortgage score requirement; or, requiring additional time since a bankruptcy, short sale, or foreclosure; or requiring employment verification for an FHA Streamline Refinance transaction.
Because of overlays, when you've been turned down for an FHA mortgage by Lender A, you should always try to apply with Lender B which may approve your FHA loan request. Plus, mortgage rates can be very different from bank-to-bank.
In addition, the FHA offers special refinance loans, home construction loans, and various benefits to eligible applicants.
To find out more about FHA insured loans call me at 707-322-9481 or visit my website at Brendamccrackenloans.com.
Brenda McCracken
NMLS 1042557
Stearns Lending
707-322-9481
The information contained on Brenda’s Mortgage News is for informational purposes only and is not an advertisement for products offered by Stearns. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Stearns Lending, its officers, parent, or affiliates.
