For 75 years, the Federal Housing Administration ( FHA) has helped secure financing for home purchases. The federal agency's impact is ever-present in our economic recovery today and may be the key that opens the door to your home.
FHA Loans: What Are They?
FHA loans are mortgages insured by the Federal government against default. Since its inception in 1934, the FHA has helped secure financing for over 34 million homes. You can get these loans through FHA-approved lenders.
Advantages of FHA Loans
Here are the top four reasons why an FHA loan may be something for you to consider.
1. Today's mortgage rates are lower for FHA financing. Fannie Mae and Freddie Mac have continued to adjust their price differential in rates offered for individuals with credit scores below 740 seeking mortgages with loan-to-value ratios above 60%. However, Ginnie Mae, the government-sponsored entity guaranteeing FHA loans has not. In many cases, if your credit score is 650 and your loan-to-value is 96.5%, you may get about the same deal as a borrower with a 780 credit score and a 50% loan-to-value. An important side note: There is currently a myth circulating that FHA will not do loans for individuals with credit scores below 620. This myth is just that -- a myth.
2. FHA features looser qualifying guidelines. Mortgage loans are more difficult to qualify for than in years past. FHA loans offer more flexibility. For example, FHA guidelines allow non-occupying co-borrowers, gifts for down payments ?tolerances for collection accounts, and debt-to-income ratios above 50% of gross income.
3. FHA loans are assumable -- creating value when rates rise down the road. If you sell before the mortgage ends, the new buyer can not only purchase your home but may be able to assume your loan. According to HSH.com, national average 30-year fixed interest rates were 8.32% in January 2000 -- a rate much more in line with historical norms. Now, imagine if rates were to go back to 2000 levels, and you'd purchased your home today with an FHA loan at a 5% rate. If the mortgage loan amount is $300,000, your monthly principal and interest payment at 5% would be $1,610. At 8.32%, the monthly payment would be $2,269. Over the life of the loan, the fixed 5% rate would save more than $200,000 in interest payments compared with the 8.32% rate. So, how much more would your house be worth if you sold your home and offered your 5% loan to boot?
4. Lower down payments allow you to leverage your assets. FHA is one of only a few financing types that does not require a significant down payment. With as little as 3.5% down -- even less when combined with an applicable down payment assistance product -- you can get yourself into an FHA loan. In effect, a lower down payment allows you to use your home as collateral rather than your existing assets, which preserves the liquidity of your assets for other uses.
Explore Options Before You Purchase
If FHA financing is not your cup of tea, there are a slew of other programs that may better suit your needs. Conventional loans, USDA Rural Development loans, and VA loans are just a few. A mortgage specialist can be a great guide to these loan products as you start your home purchasing quest.
About the Author
Josh Harmatz, MBA, is the Chief Operations Officer for Voyage Financial Group, Inc.