Qualifying For a Home Loan: 6 Reasons to Consider FHA

FHA loans are the forgotten toy in the box. Gathering dust like some old Atari game while we’ve played with our shiny new Xbox, FHA loans years ago lost their appeal. It’s time to reconsider.

Here six reasons every first-time buyer should consider an FHA loan.

100% financing. FHA was the first to offer 100% loans. FHA loans actually require a 3% down payment, but they can be combined with a 2nd loan to cover the down payment and closing costs. If you don’t need that 2nd loan because Aunt Betty wants to help, FHA will allow her to “gift” all of the necessary cash. You don’t have to contribute 5% of your own money to the purchase. While FHA will require you document your income—no “liar loans” allowed—they are often lenient with qualifying ratios, particularly now with the use of Automated Underwriting.

No Credit Score Requirement. FHA loans were the original sub prime loans. But while almost every other type of loan has a FICO requirement, FHA loans do not. This can be a big help if your credit was derailed by a one time event like an injury or illness. If you’ve since turned things around and have a clean 12 month payment history, an underwriter can look past your scores and approve your loan. And you still get the best rates.

The Best Rates. Unlike sub prime loans, FHA loans offer some of the best rates around—comparable in every way to conventional “A paper” loans, and in some cases better. FHA ARMs are most consumer friendly to be found anywhere., with rates fixed for a year at a time and 1% annual caps on the adjustments. HUD is big on sustainable home ownership. No “exploding ARMs”, no exotic loans, this is bread and butter stuff, safe and secure.

Increased Loan Limits. Here in the Sacramento region, the maximum loan amount has gradually risen to $362,790 for a single family home, $446,190 for a duplex. With prices falling below $300,000 in many parts of the area, FHA loans are now usable much more of the time. There is a good chance that these limits will soon be increased to the $417,000 conforming loan level, putting even more of the market within reach of FHA borrowers.

Just like Conventional Loans. During the first half of this decade, sellers didn’t like working with FHA borrowers because FHA requirements were too fussy. FHA required a pest report on every loan, and every structure on the property—yes even that old broken down shed—had to be inspected. The seller was required to fix everything before the close of escrow. The seller even had to pay some of borrower’s loan fees. All that has changed. FHA is now as user friendly as its conforming loan counterparts. And remember, we are now in a buyer’s market.

An Indication of Experience. There is a good chance that your lender may not have their HUD approval to offer FHA loans. There are capital requirements and regular HUD audits to which every FHA lender is subjected. Not all lenders have the reserves required and many do not wish to have their loans files audited. As I think about it, that may be a great question to ask when deciding on a lender. Very few new companies will have gone to the trouble to obtain a HUD approval. Knowing your lender can offer FHA loans might tell you something about their experience and commitment to offering the best financing available.

When interviewing mortgage lenders, ask them if they are HUD approved. If they say, “huh?”, you know what to do.

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