From Dan Green – The Mortgage Reports.
As the U.S. housing market recovers from last decade’s downturn, today’s home buyers aren’t always flush with cash. For buyers with few funds for downpayment, loans via the Federal Housing Administration remain popular.
The FHA allows loans with as little as 3.5% down.
About The FHA Mortgage
The Federal Housing Administration (FHA) was established in 1934, a period of “heavy renting”. The U.S. was emerging from The Great Depression. Just 4 in 10 households owned their homes.
At the time, mortgage terms were onerous. To get a loan meant to make a 50% downpayment; to agree to a loan term of 5 years or fewer; and, to make a “balloon” payment to the bank after the mortgage’s first few years.
Few people could meet these terms so the FHA spawned a new method of finance.
Via its Mortgage Insurance Premium (MIP) program, the FHA created a self-sufficient insurance fund through which mortgage lenders could be “paid back” in the event of a loan default.
The FHA created a series of rules known as the FHA Mortgage guidelines. The group agreed to provide to FHA-approved lenders insurance for all loans meeting the minimum standards as set forth by the guidelines.
The FHA MIP system gave banks confidence to make better loans with better terms for U.S. home buyers. Nationally, downpayment requirements dropped, loan terms lengthened, and mortgage rates were made affordable. Homeownership rates climbed.
Today, more than 80 years after its creating, the FHA remains as the only federal agency which has never taken even a dollar from U.S. taxpayers. The FHA is entirely self-sufficient.
U.S. Home Buyers Choose FHA Loans
In today’s expanding economy, U.S. home buyers have mortgage loan options.
Conventional loans are available via Fannie Mae and Freddie Mac; Rural Housing Loans are available via the USDA; 100% loans are available via the Department of Veterans Affairs and its VA loan. Even jumbo mortgages and private loans have made a comeback.
However, the FHA loan remains in high demand. It’s combination of low rates, low downpayment, and flexible guidelines has made it one of most common loan choices for home buyers today.
There are benefits to choosing an FHA loan. Here are some of the biggest.
FHA Mortgage Insurance Premiums
It may seem odd to call FHA mortgage insurance a benefit since it doesn’t come free, however, FHA MIP is what makes the program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans. However, as a homeowner or home buyer, you have ways to limits your FHA MIP costs. You can use a 15-year mortgage term, for example; or make a downpayment of at least 5 percent. As a bonus perk, FHA-backed homeowners with loans from before June 2009 get access to special reduced MIP rates.
FHA Allows A 3.5% Downpayment
For today’s home buyers, there are only a few mortgage options which allow for downpayments of five percent or less. The FHA is one of them. With an FHA mortgage, you can make a downpayment as small as 3.5%. This benefits home buyers who don’t have a lot of money saved up for downpayment; and, home buyers who would rather save money for moving costs, emergency funds, or other needs.
FHA Allows 100% Gift Funds
The FHA is aggressive with respect to gifts for downpayment. Very few loans programs will allow your entire downpayment for a home to come from a gift. The FHA will. Via the FHA, your entire 3.5% downpayment can be a gift from parents or another relative, an employer, an approved charitable group, or a government homebuyer program. If you’re using a downpayment gift, though, you’ll need to follow the process.
The FHA Doesn’t Require A SSN
Not every home buyer will have a valid social security number and, according to the FHA, that’s okay. FHA guidelines permits loans to employees of the World Bank and foreign embassies, for example. The FHA will also insure loans for non-permanent resident aliens.
There Are Many FHA-Approved Lenders
FHA loans can be funded by any FHA-approved lender. This includes mortgage lender, savings-and-loans institutions, and credit unions. The marketplace for FHA loans is giant, which creates competitive pressure among lenders to offer low FHA rates and low FHA fees. It pays to “shop around” on an FHA loan. Furthermore, because different banks use different methods to underwrite, your FHA loan can be declined by Bank A but approved by Bank B. If you meet the rules of the FHA, you can apply until your loan get approved!
There Are Many FHA Loan Products
Via the FHA, you can get a mortgage of almost any type. The agency is best-known for its traditional 30-year fixed-rate mortgage, but the FHA also offers a 15-year fixed rate loan as well as a series of adjustable-rate mortgages (ARMs). In addition, the FHA insures purchase-and-improvement loans for when you want to buy a home that needs repairs; 203k construction loans for when you want to buy a home that’s newly built; and energy-efficiency loans for when you want to finance the costs of energy-efficiency improvements into your loan. The FHA also provides a full line of FHA refinance products.
The FHA Insures All Property Types
FHA home buyers are able to purchase any home type in any U.S. neighborhood — whether in the 50 United States, the District of Columbia, or any U.S. territory. The FHA will insure single-family detached homes, 2-unit homes, 3-unit homes, 4-unit homes, condominiums, mobile homes and manufactured homes.
The FHA Has Flexible Credit Standards
Of all the available loan types in today’s U.S. market, FHA loans are among the most forgiving with respect to credit standards. The FHA does not require “perfect credit” and even instructs its approved lenders to look beyond isolated “credit events” and to consider a borrower’s complete credit history. Even borrowers with a recent foreclosure, short sale, deed-in-lieu or bankruptcy can be eligible for FHA financing. Mandatory 3-year waiting periods do not exist with an FHA loan.
The FHA Allows Larger Loan Sizes
A “loan limit” is the maximum allowable loan size for an area and, as another FHA benefit, through the end of 2013, FHA loan limits are much higher than conventional loan limits in many parts of the country. In Orange County, California, for example, or New York City, the FHA will insure up to $729,750. By contrast, conventional loans stop at $625,500. For 2-unit, 3-unit and 4-unit homes, FHA loan limits are even higher — ranging up to $1,403,400. In 2014, FHA loan limits will be reduced.
FHA Loans Are Assumable
A little-known FHA benefit is that the agency will allow a home buyer to “assume” the existing FHA mortgage on home being purchased. The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller’s loan. 5 years from now, for example, a buyer of an FHA-insured home can “inherit” a seller’s sub-4 percent mortgage rate.
How Much FHA Loan Can You Afford?
The FHA mortgage program accounts for a significant share of U.S. home buyer loan activity and, during the first three month of 2013, the typical FHA loan averaged 94% loan-to-value. The program is in high demand among low-equity homeowners and buyers.
You can visit Dan Green’s blog @ http://themortgagereports.com/