The FHA Doesn’t Require 20% Down
You don’t need 20% down to buy a home and, as a home buyer, your financing options may be more numerous than you thought.
Sure, more than half of all home buyers use conforming loans via Fannie Mae or Freddie Mac to finance their homes, making an average downpayment of twenty percent, according to mortgage loan processing software firm Ellie Mae.
But, what about the other half?
An overwhelming percentage of today’s home buyers use a low-downpayment mortgage option backed by the Federal Housing Administration (FHA).
The program, which allows down payments of as little as 3.5% on a home, is available in all 50 states and comes with mortgage rates which are among the lowest available in today’s mortgage market.
Since 2014, FHA mortgage rates have been conforming rates by an average 15 basis points (0.15%).
However, just because its mortgage rates are lower, there are elements to consider before choosing FHA-backed financing.
If you’re asking the frequently-asked mortgage question — “What type of mortgage is right for me?” — the answer may be tucked within the guidelines of FHA financing which allow for low-downpayments, below-average credit scores, and a flexible interpretation of income and asset documentation.
Thinking of buying a home but worried about your downpayment? Give a look at the FHA mortgage.
What Is The FHA?
The Federal Housing Administration (FHA) is a government agency which was formed in the 1930s to promote homeownership nationwide.
At the time, mortgage loans were unavailable to everyday consumers.
Because of the economic climate, banks typically required downpayments on homes of at least 50 percent; and, required home buyers to accept loan terms no longer than 5 years.
Few buyers had fifty percent to put down on a home, and fewer could make the payments of a loan which required complete pay-back within 60 months of purchase.
Housing was flailing.
Now, the government had very little money in the early-1930s but it knew that giving people the means to make roots in communities would help stabilize U.S. households and buttress the domestic economy.
In response, it launched the world’s first mortgage insurance company — the FHA.
As a mortgage insurer, the FHA published a list of minimum standards for U.S. home loans. All loans meeting those minimum standards, the FHA told banks, would be eligible for insurance against default.
This meant that mortgage lenders could make loans against the rules of the FHA instead of their own; and, the FHA was far more lenient than any bank would be. The FHA’s creation sparked a flurry of lending and played a large role in nation’s post-depression economic recovery.
Today, the FHA is the largest insurer of mortgages in the world.
FHA Guidelines Help Home Buyers
The FHA was created more than 80 years ago, but its role in today’s housing market remains huge.
1-in-4 buyers used the FHA program to help purchase a home last month.
Among the primary reasons why FHA loans remain popular is that FHA guidelines allow for a home downpayment of just 3.5 percent, which is less than the twenty percent many home buyers believe they have to have saved.
Another reason why FHA loans are still common after 80 years is that FHA guidelines are looser on credit scores as compared to conventional loans via Fannie Mae or Freddie Mac.
With Fannie Mae or Freddie Mac, buyers must have an “excellent” credit score in order to get access to the lowest available mortgage rates; and, as credit scores drop, mortgage rates increase.
With the FHA mortgage program, all borrowers get access to the same mortgage rates regardless of credit score.
Buyers with 580 FICO scores get the same rates as buyers with FICO scores over 700; and those rates beat conventional rates by more than one-eighth of a percentage point, on average.
Furthermore, the FHA allows your real estate agent to negotiate seller concessions of up to six percent as part of your contract, which means that you could have your home seller pay for your closing costs and pre-paid items, including real estate taxes and per diem interest charges, further reducing your cash-at-closing.
FHA Mortgage Insurance Premiums
So, what’s the cost of getting access to FHA financing? It’s the cost of FHA mortgage insurance premiums (MIP).
FHA mortgage insurance premiums are paid in two parts.
The first part is paid upfront at the time of closing. Not surprisingly, this payment is known as the Upfront Mortgage Insurance Premium (UFMIP). Currently, the FHA assesses an insurance fees equal to 1.75 percent of your loan size, and adds it to your borrowed amount.
Upfront MIP is not paid as cash; it’s “rolled in” to your loan.
The cost of the FHA upfront mortgage insurance premium has changed several times since 2008. It’s been as low as one percent of the borrowed amount; and as much as two percent.
The cost of the FHA’s other insurance cost — its monthly mortgage insurance premium (MIP) — has changed, too.
Currently, homeowners with a 30-year fixed-rate FHA loans pay 0.85% in FHA MIP annually. This is nearly half what the FHA used to charge.