Low-Downpayment Option: The FHA Loan
There are a lot of reasons to like the FHA mortgage.
As a program with an 80-year history, the FHA has helped millions of renters become homeowners; and has done it with flexible underwriting standards, low downpayment requirements, and widespread availability.
You can get FHA financing from nearly any mortgage lender with just 3.5% down, and interest rates are often terrific.
As compared to a conventional mortgage, mortgage rates for an FHA loan can be as much as 25 basis points (0.25%) lower; and for borrowers whose credit scores aren’t “perfect”, that gap can grow two- or three-fold.
Buying a home and want to make the smallest downpayment possible? Take a look at the FHA mortgage today.
FHA Loans: 3.5% Downpayment
The FHA loan program is a product of the Federal Housing Administration, which is an agency within the U.S. Department of Housing and Urban Development (HUD).
Born in 1934, the FHA loan was launched to promote homeownership in a post-depression housing market.
Among the program’s most widely-used features is its minimum downpayment requirement of just 3.5 percent, or $3,500 per $100,000 borrowed.
In today’s mortgage market, there is no other generally-available mortgage program which allows a downpayment of such a small size.
There are programs which offer lower downpayment such as the no-money down VA loan and the 100% USDA mortgage, but these programs carry a secondary eligibility standard such as minimum military service time; or, maximum household income levels.
There’s also the HomeReady™ mortgage, which allows for 3% down. However, eligibility is limited by income or geography.
The Federal Housing Administration has insured more than 34 million mortgages for U.S. lenders since the program’s inception. The agency’s insurance is among the reasons why FHA mortgage rates are often so low.
Because the FHA insures mortgage lenders against loss on a loan, lenders carry less risk with an FHA loan as compared to a conventional one. With less risk comes lower rates.
Current FHA Mortgage Rates
FHA mortgage rates don’t come “from thin air”. There is a formula by which they’re made, and that formula begins with something called a mortgage-backed security (MBS).
Mortgage-backed securities are bonds, bought and sold on Wall Street. They are, literally, bonds secured by mortgages — in this case, mortgages from the FHA.
FHA mortgages are brought to Wall Street via a group within HUD known as the Government National Mortgage Association (GNMA). This agency is more commonly called “Ginnie Mae”.
Like stock prices, bond prices change constantly. The price of a Ginnie Mae bond today won’t likely be the price of a Ginnie Mae bond tomorrow. Prices are based on supply and demand.
When demand for Ginnie Mae MBS is high, bond prices rise. When demand falls, bond prices fall.
FHA mortgage rates move inversely to the price of a Ginnie Mae bond. When bond prices rise, mortgage rates drop. Conversely, when bond prices drop, FHA loan rates rise.
Predicting where FHA mortgage rates will be tomorrow, next week, or next year is a challenge. However, because Ginnie Mae bonds are backed and guaranteed by the U.S. government; and because U.S. government bonds are virtually risk-free to investors, there are general rules which can help you forecast where FHA rates might go next.
These rules are based on mortgage-backed securities being among the safest asset classes in the world.
In general, when the U.S. economy shows signs of weakness; or, when there’s uncertainty in the global economy, FHA mortgage rates often improve.
This is because weakness and uncertainty tend to drive Wall Street toward “safe” assets and away from more risky ones, and the additional demand for Ginnie Mae bonds drives down FHA loan rates.
When the economy is improving, the opposite occurs. Wall Street moves away from safe assets and toward more risky ones. Mortgage bonds sell off and FHA loan rates rise.
The Benefits Of An FHA Mortgage
FHA mortgage rates are typically low, and the FHA loan program allows for a 3.5% downpayment. However, there are other reasons why a home buyer may want to finance a home via the FHA.
Along with its flexible underwriting, FHA loans offer a number of benefits not available via other loan popular loan program.
First, FHA loans are assumable.
Assumable loans are loans which, literally, can be assumed by another homeowner. This means that a homeowner with an FHA loan rate at, say, 3.50% could sell its home and its mortgage to a future home buyer. This is a huge deal in a rising mortgage rate environment.
The FHA loan’s assumable feature can you sell your home more quickly.
A second benefit of the FHA loan program is that FHA interest rates are the same no matter how high or low your credit score; or, how big or small your downpayment.
Unlike conventional mortgage rates which vary on low credit scores and low downpayments, FHA mortgage rates are the same no matter what.
Third, the FHA doesn’t care if you’re buying a one-unit home or a 2-4 unit property — your mortgage rate won’t be subject to adjustments the way that a conventional rate would.
It’s often more affordable to buy 2-unit, 3-unit, or 4-unit homes via the FHA loan program as compared to a program via Fannie Mae or Freddie Mac.
“Special” FHA Loan Programs
Beyond just low FHA mortgage rates and the flexible guidelines, the FHA offers more to its borrowers. The agency provides access to a series of loan programs which promote homeownership and low monthly payments.
One such program is the FHA 203(k), which the Federal Housing Administration’s “construction loan”. Via the 203(k), consumers can borrow the costs of a home improvement project instead of paying for it with cash.
The 203(k) can be used for structural improvements to a home including moving walls and replacing plumbing; or, for smaller projects such as replacing windows or flooring.
Another FHA program is the FHA Back to Work mortgage, which waives the typical three-year waiting period after a short sale, bankruptcy, or foreclosure. Via FHA Back to Work, mortgage applicants who experienced an “economic event” can apply for a loan with the FHA after just 12 months.
FHA interest rates on the Back to Work program are the same as with any FHA-backed home loan; there are no additional fees charged at closing.
But, perhaps the more valuable loan program from the Federal Housing Administration is its FHA Streamline Refinance loan.
The FHA Streamline Refinance program is a service provided to all FHA-backed homeowners. Via the program, so long as a homeowner’s been making monthly payments on time; and, so long as those payments are dropping by five percent or more, the FHA will allow a no-verification refinance to today’s current FHA mortgage rates.
The FHA Streamline Refinance is among the fastest, easiest ways to lower your monthly mortgage payment and all FHA-backed homeowners get access to it.