by Lee Nelson
You want to buy a house. Good for you. But you don’t have a lot of money to put down on it, and your credit history isn’t as stellar as you’d like it to be.
Well, the government still has a mortgage loan for you – it’s the FHA (Federal Housing Administration) loan. But there are a lot of misunderstandings about this loan. For instance, it isn’t just for first-time home buyers. It can be for almost anyone even those who make a lot of money.
But the government has changed some of its rules recently with FHA loans making it more expensive for buyers to have and limiting its borrowing limits in some parts of the country, says Kirsten Fleenor, branch manager of Array Capital Investments in Dallas. This is making the FHA loan out of reach for some potential homeowners.
“We used to do 90 percent of our loans with FHA. Now, it’s down to 80 percent and going down even more,” she says. “When the housing market bombed, and everything tightened up, FHA realized it needed to slow down and regroup with what it already has.”
Hence, more restrictions and more insurance costs were added. But Fleenor and other lenders say it can still be a great resource for those who can’t get a conventional loan.
Here are FHA loan pros and cons:
Lower Credit Scores are OK
Your credit score doesn’t haven’t to be high for an FHA loan. Some mortgage lenders out there will underwrite an FHA loan to someone with a 580 credit score, says Greg Iverson, senior loan officer at USA Mortgage in St. Louis.
“We are at a minimum of 600. A lot of lenders will have overlays and only accept 620 or above. There is a lot of flexibility in those numbers,” he says.
Even those who lost their home to foreclosure, short sale or divorce or went bankrupt, they can qualify for FHA loans after a certain amount of time reestablishing credit.
“Something happened that damaged their credit, and they can’t get a conventional mortgage. But an FHA loan allows the family to move on and have a home for their family,” Iverson says.
Low Down Payment and Monetary Gifts Are Accepted
FHA also allows buyers to put down only a 3.5 percent down payment, plus the entire down payment and closing costs can come from a gift from family or friends. With conventional loans, lenders require you to have your own funds saved up for these costs. Some allow for some financial help from others, but it has to be much documented and not for the entire cost, he says.
Sellers Can Pay Some of the Closing Costs
If you have a seller that is willing to help with the closing costs, you can ask up to 6 percent of the purchase price of the house for those costs.
“Most traditional mortgages allow only a maximum of 3 percent contribution,” says Iverson.
A Non-Occupying Co-Borrower is Accepted
For those who need a co-signer for your loan, FHA provides that opportunity, too. FHA allows a non-occupying co-borrower, like a parent, to go on the loan with you.
“The non-occupying co-borrowers are using their income and assets to support the loan,” Iverson says.
He has clients that are using this FHA component. A couple moved from Chicago to St. Louis to open up a restaurant. The restaurant is doing great, but they are not making a lot when you look at their tax return.
“We are using his dad as a non-occupying co-borrower to go on the loan for the next year or two. This allows the couple to buy a house now and eventually look at refinancing into a conventional loan later. That’s a huge pro,” he says.
That perfect home waits for you. But if you are relying on an FHA loan, there will be limits of how much you can borrow depending on where the house is that you want to buy. And as of Jan. 1, those limits have been lowered in some of the most expensive areas of the country to live.
According to a Department of Housing and Urban Development (HUD) press release, new FHA single-family loan limits for the highest cost areas of the country were reduced from $729,750 to $625,500. The current standard loan limit for areas where housing costs are relatively low will remain unchanged at $271,050.
“As the housing market continues its recovery, it is important for FHA to evaluate the role we need to play,” said FHA Commissioner Carol Galante. “Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved.”
Mortgage Insurance Premium and Upfront Mortgage Insurance Payment
The government is backing the FHA loan, even though it doesn’t provide the loan. But to protect the government, a Mortgage Insurance Premium (MIP) is charged each and every month of the loan. It’s almost double what people pay with traditional loans (called a Private Mortgage Insurance or PMI) when the down payment is below 20 percent of the loan.
And the government decided just last year to make the MIP a continuous charge throughout the loan. There used to be a time when the payments would stop once you paid down the principal to 20 percent of the original loan. Not anymore.
An FHA loan also has an Upfront Mortgage Insurance Premium for the cost of insuring the loan.
“The cost of an FHA loan has gotten higher compared to a conventional loan,” says Fleenor. “As a loan officer, you look for the best interest for a client. If they can go with a conventional loan that is the route they should do instead of an FHA loan.”