FHA loans began to lose favor in the late 1990s, when home values began to inch upwards, surpassing FHA mortgage limits, and sellers balked at FHA's stringent appraisal guidelines.
How FHA Loans Work
Now, FHA does not make loans or guarantee loans. It insures loans. The insurance removes or minimizes the default risk lenders face when buyers put down less than 20 percent. Without further approval from FHA, its approved lenders are authorized to:
Take loan applications
- Process loan applications
- Underwrite and close the loan
FHA Mortgage Limits
My parents bought our first home in 1955 for $9,000 with an FHA loan. It's almost inconceivable to think of a home costing that today. As a result, FHA periodically changes its mortgage limits. As of January 1, 2009, the maximum mortgage limit in high-cost areas is 115% of local median prices, not to exceed $625,500. The maximum conforming loan limit is $417,000 for single-family residences nationwide. Your area could support a lower mortgage limit. Here is how to find your FHA mortgage limit.
FHA Loans Allow a Blemished Credit History
If your credit is less than perfect, FHA might be the loan for you. You may qualify for an FHA loan even though you have had financial problems.
- FICO scores can be lower than those for a conventional loan.
- Bankruptcy. You can obtain an FHA loan two to three years from the date of your bankruptcy discharge, as long as you've maintained good credit since your debts were discharged.
- Foreclosure. If you keep your credit in excellent shape since a foreclosure, an FHA loan will be available to you two to three years from the final date of your foreclosure.
FHA Loans Boast Competitive Rates & Terms
Today's terms are pretty straightforward. In fact, in many markets the rates and terms are better than those for 80% / 20% piggyback loans.
- There is little or no adjustment to the interest rate for an FHA loan, as the rates vary within .125 percent of a conventional loan.
- Mortgage insurance is funded into the loan, meaning a premium of 1.5% is added to the loan balance instead of being paid out-of-pocket. In addition, a small portion for the mortgage insurance premium is added to the monthly payment, but it is far less than private mortgage insurance premiums.
- As of January 1, 2009, Borrowers can finance 96.5% of the purchase price and put down 3.5 percent. In some instances, when combined with other types of loans, the down payment can be zero.
- Allowable debt ratios are higher than the debt-ratio limits imposed for conventional loans.
FHA Loans Demand Fewer Repairs
At one point, FHA repair demands were so excessive that sellers would discount the list price to buyers who would agree to obtain conventional loans over FHA loans. Today the FHA repair guidelines appear more reasonable.
- Defective roofs that leak still need to be replaced but an older roof does not necessitate replacement if it doesn't leak.
- Windows that stick upon opening or have cracked panes do not require replacement.
- FHA appraisals do not take the place of a home inspection, never have. Buyers should still obtain a professional home inspection.
FHA loans are available to anybody but are used most often by first-time home buyers and low- to moderate-income buyers. However, there are no income limit qualifications.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.