There are numerous loan options offered by the Federal Housing Administration (FHA): Renovation, Energy Improvement, loans on tribal lands, disaster replacement loans and reverse mortgage loans. The most common FHA loan is called a 203(b) and yet most borrowers don’t know much about it. If your lender is recommending this loan, you should be aware of the many pros—but also some key cons—of the program. First, the good news:
• Allows for Non-resident Co-borrowers. While FHA loans are only allowed on owner-occupied properties, the program does allow for a co-borrower who will not live in the home. For example, parents can co-sign on a child’s home loan but do not have to actually live in the home.
• Low Down Payment. FHA 203(b) loans can be great for buyers who don’t have a lot of money to put down. The program allows for as little as a 3.5% down payment. So, if you are purchasing a $350,000 home, your down payment could be as low as $12,250.00. FHA also allows for the same minimum down payment for a duplex which qualifies for higher loan limits.
• Low Credit Score. When it comes to credit, FHA is very flexible. A borrower could have been through Chapter 7 bankruptcy finalized two years prior to loan application—as opposed to a conventional loan which would require a four-year waiting period. And in the case of foreclosure, FHA will consider a new loan after 3 years while conventional loan programs (Fannie Mae and Freddie Mac) would require a 7-year waiting period. And with an FHA 203(b) your credit score can be as low as 580, while other loan programs require a higher minimum credit score.
• Allow Down Payment & Closing Cost Assistance. The entire down payment and closing costs can be paid by a relative as gift funds. And the seller can pay the buyer’s closing costs (but not the down payment).
• No Prepayment Penalty. There are various loan terms available but the most common is the 30-year amortization. FHA does not impose a prepayment penalty so the loan can be paid off in full or partially at any time.
Overall FHA is a great loan program and is often used with first time home buyers. Now the minuses:
• Lower Loan Limits. FHA 203(b) loan amount limits are different in different parts of the country depending partly on local market rates. For example, in the Seattle area the maximum FHA loan is $891,250, while in Jackson County, Oregon it is $420,680. So, this program is only available on homes below the current median price in Jackson County.
• Not for Investment. FHA 203(b) loans are not available for investment, second, or vacation homes.
• Required Mortgage Insurance. The biggest downside for borrowers of an FHA loan is the required mortgage insurance. This is not life insurance or mortgage life insurance which pays off the house in the event of death. This is an insurance that protects the investor on the loan. FHA loans are considered higher-risk investments and therefore require two layers of mortgage insurance. In the example above of the minimum down loan, there would be an upfront mortgage insurance premium of 1.75%. This fee can be paid with cash by the buyer or the seller or can be financed into the loan (which is the most common practice). In addition, there is a monthly mortgage insurance payment that is included in the loan payment. FHA takes the loan amount, multiplies it by 0.85%, and then divides that number by 12 to arrive at the monthly mortgage insurance premium. Unlike with conventional loans, on a minimum-down FHA loan the mortgage insurance premium is on the loan payments for the life of the loan. It is only repaid once the mortgage loan is paid off.
So how do you know if an FHA loan is right for your situation? Call me and we’ll discuss!
Dave Porter (NMLS # 483876; www.davesporter.com) is the Sales Manager for loanDepot in Southern Oregon. He is licensed to offer loans in OR, WA, ID, CA and AZ. You can reach him at dporter@loanDepot.com or 541-708-4020.
This information is not intended to be an indication of loan qualification, loan approval or commitment to lend. Loans are subject to credit and property approval. Other limitations apply. Rates, terms and availability of programs are subject to change without notice. State disclaimer: loanDepot.com, LLC, NMLS ID 174457. www.nmlsconsumeraccess.org Licensed by the OR Division of Finance and Corporate Securities, Mortgage Lending ML-4972. | WA: Licensed by the WA State Department of Financial Institutions, Consumer Loan Company CL-174457. | ID | CA: Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act CRMLA 4131040.