Don’t Count Out FHA Loans
FHA Loans are all the rage right now! As they should be! For some buyers, FHA loans are a GREAT option, and as a realtor or a borrower, you want to find the perfect home and secure the best possible financing options for yourself or for your clients. And there are many reasons why you shouldn’t rule out FHA loans.
Addressing the Myths About FHA Loans
An FHA loan is a type of mortgage loan that is insured by the Federal Housing Administration and designed to help people of various financial backgrounds get into homes. They can be popular with first-time home buyers because they require a lower down payment (only 3.5% down!) and can have more lenient credit score requirements. Unfortunately, that has given FHA loans a bit of a “bad name” in the real estate world, with the stereotype being that FHA loans are for poor credit borrowers or lower-income borrowers only.
That could not be further from the truth! While yes, the FHA program can be more lenient with credit scores and help low-to-moderate income earners get into their first homes—it doesn’t mean that high credit score borrowers or higher income earners shouldn’t do an FHA loan. Sometimes, it is clearly the best option for someone of any credit or income level because it simply makes their overall monthly payment lower than if they did a Conventional loan.
In fact, we recently compared a Conventional loan with 5% down to an FHA loan with 3.5% for a borrower, a 695 credit score, a 45% debt ratio, and a $360K purchase price….the FHA loan was $120 less per month! This is a perfect example of how an FHA loan might not have been the “obvious” choice to a realtor or borrower at first but really does end up being the best option. Who doesn’t want a lower overall monthly payment?!
But What About Mortgage Insurance?
In the past, FHA loans have had a harder time competing with Conventional loans because of the monthly insurance rate that is required with a lower down-payment. But recently, FHA reduced monthly PMI, AND they have minimal pricing adjustments for credit score and debt-to-income ratios. Woo woo!
This is how FHA loans have become very competitive in the market again—because, as you can see, they can end up shaking out to be a cheaper option for borrowers—regardless of their credit scores.
So while in the past borrowers might have been worried about not putting more down because of the monthly insurance rate, they can rest a bit easier now and leave those calculations to us. If it ends up being a more cost effective option for them to do an FHA loan, they could even use some of that extra down-payment money they might have been saving up to cover renovations in their new home instead or to buy furniture after they’ve moved in. All while knowing the FHA was still the cheapest, and best loan option for them! A win-win.
Use a Lender With Experience
Another reason that the FHA loan has a bit of a negative reputation is that there are lenders out there that try to do the program without knowing the process—and/or they broker them through another institution which means they lose control. This causes lenders to say things like “FHA loans take a while” or “FHA loans are expensive,” but it’s just not true. We’ll close these in 3 weeks or less, even in the very busiest of times—with no delays!
We’ve always done FHA loans, and we’ve always supported the program. Trust consistent lenders—be cautious if a lender is jumping on the bandwagon so that you don’t end up in a situation that spins out of control. Protect yourself or your buyer with experienced FHA lenders!
We are grateful for the support of so many realtors in our markets. Thank you for your knowledge and willingness to understand the ever-changing world of lending!