FHA Mortgages

FHA loans developed as a financing alternative years ago when the typical conventional loan required the customer to fit into a specific "lending box". The typical conventional customer had steady employment, a reasonable down payment, and great credit history. Unfortunately, not all borrowers fit into those specific criteria and with the help of government backing the FHA loan emerged.

As the lending market changed throughout the decade of 2000 and as conventional lending became very aggressive with 0% down payment loans, FHA lending subsided. In the recent 4-5 years as conventional lending has tightened up FHA again emerges as an option for those that need extra consideration.

FHA loans are often misunderstood that they are for those with poor employment history and bad credit. In fact, many of my first time home buyers are surprised to find out the advantages of an FHA loan in today's market.

Here are a few examples of why you should consider and FHA loan:

1. Rates are typically 1/8-1/4 lower than a conventional loan
2. Rates are not driven by credit scores, unlike conventional loans
2. Closing costs are typically lower due to a reduced origination fee
3. The maximum down payment is 3.5% vs. 5% of the conventional
4. The entire down payment can be a gift from a family member
5. Underwriting takes into consideration "life's bumps and bruises"
6. No reserve requirements are expected after closing
7. A loan with a co-signor pools all income and assets of all borrowers allowing
a higher qualifying mortgage vs. the conventional co-signor

A couple of differences

1. FHA has an additional upfront mortgage insurance premium. It is currently
1% of the loan amount and is financed into the loan. So the final loan amount
is slightly higher.
2. FHA's monthly mortgage insurance premium is 1.15% vs. lower conventional rates

My favorite difference

FHA loans are assumable. We are currently in a very low interest rate environment. As rates continue to rise with the expected economic recovery, new buyers will be forced to use current interest rates. FHA loans can be assumed by the new buyer and they will keep the existing terms of the FHA loan such as interest rate, loan balance and remaining term.

Let's say the year is 2016. You've owned your home for 5 years, financed with an FHA mortgage rate of 4.375% and it's time to move up in housing for a growing family. New buyers in 2016 will be forced to attain current interest rates and I believe as our market recovers interest rates will certainly go up. However, as you put your home on the market you can advertise to potential buyers that you have an assumable FHA mortgage. If they qualify, the assumption process will cost them $500 and they'll take over your loan where you left off. Obviously, there will most likely be a difference from your existing loan balance and the final sales price of your home. The new buyer can assume your mortgage and make the difference up with either additional down payment or a new second mortgage.

As you can see FHA loans have many features and benefits to buyers. Sitting down with a mortgage professional to review your needs will help determine if an FHA loan is appropriate for you. I can be reached at brian@brianparkinson.com or 612-282-5863.