FHA financing has become the primary way to finance the purchase of a home when the buyer has less than 20% for down payment. Why is this? And who should get an FHA loan? There are numerous reasons, but below are some of the primary advantages that FHA financing has versus Conventional (Fannie/Freddie) financing.
- FHA only requires 3.5% down payment. In California, a "declining market" state, the minimum down payment is generally 10%, though a buyer using Conventional financing with 10% down better have a 740 FICO.
- The down payment can be "all gift" with FHA. With general Conventional guidelines, a buyer would need to have 20% down payment for the entire down payment to be a gift.
- No need for approval by an outside Mortgage Insurance company when financing with FHA. For anyone with less than 20% down payment, some form of mortgage insurance will be necessary. In California it has become very difficult for all but the most pristine borrower to get mortgage insurance, even with a 15% down payment. Private mortgage insurance, even at 90% loan to value for borrowers with a 740 FICO score(if even they can get it), is still more expense than the factor used by FHA. (at least in California, a declining market state.)
- If the down payment is coming from a 401K, FHA does not count the 401K loan payment in the overall debt to income ratios. Conventional financing does. This can really lower the amount a buyer would qualify for.
- Non-occupying co-borrowers are allowed with FHA financing. This means a parent or family member can provide help to another family member looking to buy a home.
- Lower interest rates for borrowers who have FICO scores less than 720 and less than 20% down. As a matter of fact, for buyers whose FICO scores are under 700 on a Conforming loan ($417,00 or less), even with 20% down should consider an FHA. If they are buying a condo the difference is even more in favor of FHA. For buyers who have 20% down on a Agency Jumbo ($417,001 to $729,750), they should at least consider FHA if their FICO drops below 720. If a Jumbo buyers FICO is under 700, FHA may become the better way to go. And once again, if the property is a condo, the differences in favor of FHA will be more pronounced.
Only a year ago FHA loan limits were so low that, at least in Orange County, CA, it was difficult to find a home that fit within FHA limits. Now FHA limits are as high as Conventional. Every deal is different and there are many things to consider. Now more than ever, a buyer needs to make sure they are getting the right type of loan when buying a home. Thoroughly examine each scenario carefully to make sure you are comparing "apples to apples."
Authored by Tim Storm, CMPS, Sr. Loan Officer with Home Point Financial, a Direct Endorsed FHA Lender located in Newport Beach, CA. For information on FHA, or to be prequalified please call 949-829-1846.