Key Insights
- FHA loans finance 1 in 8 housing loans sold in the US every year.
- FHA loans are not restricted to lower-income homebuyers
- FHA loans are not restricted to first-time homebuyers
Created in part by the National Housing Act of 1934 under the administration of Franklin Delano Roosevelt, the Federal Housing Authority, FHA loans were designed to “…create access to affordable mortgage credit for those households and communities that are underserved by the private mortgage finance market,” said former FHA commissioner Carol Galante.
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Since many real estate agents have clients who may choose to use FHA financing for their home purchasing, here are seven facts about FHA loans and financing that may be useful. (Just remember that one in three buyers is a first-time buyer and may need FHA financing.) These facts come via Steve Cook, the editor of the Down Payment Report, in a piece he wrote for InmanNews.
1. The “life of loan” policy on mortgage insurance is one of the most unpopular features of mortgage financing BUT FHA borrowers do NOT have to pay FHA mortgage insurance forever.
– FHA borrowers can get out of FHA mortgage insurance by refinancing their mortgage with a conventional mortgage.
– To refinance, borrowers must wait at least 210 days after the FHA mortgage clears or have 6 months of on-time payments before applying to refinance their FHA loan.
– This is a GREAT option AS LONG AS low rates continue.
2. FHA financing is more lenient than other conventional lenders with homeowners who have previously experienced bankruptcy or foreclosure.
– If bankrupt, qualified borrowers have a 2-year waiting period before applying for a FHA loan.
– If foreclosed, qualified borrowers have a 3-year waiting period before applying for a FHA loan.
– There are additional caveats involved with both bankruptcy and foreclosure so please do additional research if those circumstances apply to your clients.
3. Borrowers can qualify for FHA mortgage loans with lower credit scores than conventional mortgage require.
– Borrowers can qualify for a loan with a 3.5% down payment with a credit score as low as 580.
– Credit scores between 500-579 can be eligible with a 10% down payment.
– Know that Fannie and Freddie do NOT buy home loans with credit scores less than 620.
– In December 2019, the average credit score for an approved FHA purchase loan was 679; the average credit score for an approved conventional purchase loan was 755.
4. There is no guarantee but FHA loans usually have lower interest rates.
– FHA loan interest rates usually come in at 0.125-0.25% less than conventional loans.
– In December 2019, the FHA loan interest rate for a 30-year fixed was 3.79% compared to an interest rate of 3.98% for a conventional loan.
5. FHA financing must be primary residences where the owners live the majority of the time.
– Second homes, vacation homes, investment properties do not qualify for FHA loans.
– FHA financing requires that owners move in within 60 days of closing.
– FHA loans limit the size of loans it will insure and those loan limits vary by location and change annually.
6. FHA debt-to-income ratios, more lenient than conventional financing, were 31.9% for housing related debt in 2019 and 43% for total debt in December 2019. Its average DTI was 28% on the front end and 44% on the back end.
– Conventional DTI was 23% for housing costs and 36% for all monthly debt and payments.
7. FHA tightened its treatment of student debt and now requires student loan debtors to include 1% of their student debt to be tacked on to their total DTI calculation.
– The FHA threshold here is 43%.
Thanks to InmanNews and Steve Cook for source data.
