FHA Loans: Opening Your Doorway to Homeownership in the S.F. Bay Area
During the Great Depression, the federal government sought to create a stable platform for economic growth, and that platform was homeownership. Through bolstering the rate of homeownership, the feds felt citizens would be in a better position to give back to the economy.
With that in mind, in 1934, the Federal Housing Authority (FHA) was established. The FHA was not created to actually lend money; rather, it was created to insure the loans made by approved lenders, such as W.J. Bradley, and to protect the lenders against defaults on the loans.
If a borrower obtains an FHA loan and then defaults on it, the lender is compensated by FHA, and thus the lender will not lose as much money and is therefore more willing to lend according to FHA guidelines.
Inviting Terms
Fast forward to today, and the FHA loan program remains an extremely attractive option for homebuyers seeking financing. Originally considered a program mainly for first-time buyers, FHA loans are now one of the most popular types of loans for all types of borrowers due to a variety of attractive features:
- Low down payment. For many borrowers, it can be difficult to come up with a 20 percent down payment for a home loan. FHA loans let new buyers put down as little as 3.5 percent of the home’s purchase price as a down payment on the loan. Gift funds may be used for the down payment, which means you may not need to come up with any cash at all.
- Market-appropriate loan limits. For many years, FHA loans had very low maximum loan limits, which limited their potential in many markets. This became doubly true during the recent housing boom. But in 2007 the FHA raised its loan limits to give prospective buyers better opportunities. Now FHA loan limits equal the median home price in your market.
- Lower credit requirements. Building up a solid credit score takes time, and can be frustrating for first-time buyers who want to increase their scores, but you don’t need a credit score in the 700s to qualify for an FHA loan. While there are no set credit requirements, it’s best to contact me to determine if your credit history along with other factors will qualify you for an FHA loan.
- Lowered up-front mortgage insurance rate. The FHA requires mortgage insurance to protect itself from loan defaults, but the good news is that the premiums were recently reduced to 1 percent, lowering the fees home buyers need to pay down from 2.25 percent. The premium can be paid directly by the borrower or rolled into the loan amount.
In the past FHA loans were considered “risky” or even just too much trouble for lenders, with strict regulations regarding the state of the property and requirements that had to be met before an FHA loan would be approved. Borrowers who applied for an FHA loan were also sometimes considered high-risk, because usually they would not qualify for conventional funding. Relaxed guidelines combined with the state of the market have taken the stigma off of these loans and made them a great choice for nearly any borrower.
Other Considerations
While FHA loans offer less stringent terms than you would find with conventional loan requirements, they are also designed to ensure responsible homeownership. FHA loans impose ratios on borrowers’ debts in relation to their income. To qualify for an FHA loan, your mortgage payments (principal, interest, property taxes and property insurance) should be no more than 31 percent of your gross monthly income, while your total monthly debt obligations (the mortgage, credit cards, car loans, student loans, etc.) should be no more than 43 percent of your monthly household income.
The FHA also requires you to pay mortgage insurance as a way to protect itself from loan defaults by building cash reserves. Borrowers must pay 1% of the loan amount as an upfront mortgage insurance premium. This fee can be rolled into the financing of the loan and was recently lowered from the previous 2.5% requirement. In addition, annual mortgage insurance payments are also required, divided into monthly payments of .85% to .90%, according to the loan-to-value ratio. This is a slight increase over the previous cost, but works out to only about $22 per $100,000 financed.
If you’re looking to purchase a new home or refinance a current mortgage, but are worried you don’t have enough for a down payment or that your credit is too low, remember that FHA loans may present a perfect option.
If you’d like to learn more about FHA home loans, or you have a friend or family member who might be interested, please don’t hesitate to reach me using the contact information provided on this newsletter. I’d be happy to help!
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