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FHA Loans Mean Easier Qualifying
Nearly all home buyers that get an FHA mortgage buy their home with a low down payment or even no down payment. Many are low income or moderate income borrowers who take advantage of FHA’s easier qualifying guidelines.
FHA loans are particularly worthwhile to home buyers with less cash because FHA does not require borrowers to have what are known as reserves after closing. Reserves are funds that borrowers have left over after everything else has been paid in a home purchase or mortgage refinance. Conventional mortgage guidelines generally require that the borrowers have two months worth of house payments left over as a reserve or cushion after the transaction is completed, and some programs require three months reserves. The logic is that borrowers who have funds in reserve will have less difficulty making mortgage payments in a financial emergency.
Some conventional home buyers’ loans are denied because of insufficient reserves or funds remaining after closing the transaction. Because FHA does not require reserves, qualifying is easier, and the home buyer can get into the house with less cash.
FHA does not take the home buyers’ credit score into consideration, which means that a home buyer with a low credit score who would ordinarily be forced into seeking financing in the alternative mortgage market at higher rates and fees, might be able to secure more affordable financing with an FHA mortgage. Despite that, some lenders do have minimum credit score requirements. If your lender is one that requires a minimum score to obtain an FHA loan, it might be wise to find another lender that adheres strictly to FHA guidelines.
FHA requires a 3% investment from the home buyer, but does allow that 3% to be in the form of a gift. That has spawned an entire industry that donates funds to home buyers. Most of the time, those donations come from the home’s seller--a practice that FHA accepts. The upshot is FHA home buyers can buy a home with no down payment.
Other benefits of FHA financing are:
- Closing costs can be financed.
- Lower monthly mortgage insurance premiums and, under certain conditions, automatic cancellation of the premium.
- More flexible underwriting criteria than conventional loans.
- Limits on the amount lenders can charge for some closing costs (e.g. the origination fee can be no more than 1% of mortgage).
- Loans are assumable to qualified buyers, which might be a significant factor come resale time it mortgage rates are higher.
- FHA loans have no pre-payment penalty.
If you want to determine whether you can get an FHA mortgage, go to Mortgage Marketing Associates and let Bob Roscoe make a determination for you.
