The U.S. housing market is near fully recovered from last decade’s downturn. However, homebuyers today are rarely flush with cash to make 20% down on a purchase. Low- and no-down payment mortgages remain popular with first-time buyers and repeat buyers alike; and one of the most popular low-down payment mortgage program is the FHA loan via the Federal Housing Administration. Nearly 1 in 5 U.S. buyers uses an FHA loan to finance a home purchase. The program’s popularity, in part, is because buyers can make down payments of just 3.5 percent via the FHA. But, there are other reasons why FHA loans are in demand, too. In addition to loose underwriting standards, FHA mortgage rates are lower than comparable conventional rates; and a home’s subsequent buyer can assume FHA loans. This is especially valuable in a rising mortgage rate environment with the FHA Loan Program.
The Federal Housing Administration (FHA) was established in 1934, which, in U.S. history, was a period of “heavy renting”. The country was emerging from The Great Depression. Just 4 in 10 households owned their homes. At the time, the mortgage terms offered by lenders were onerous. To get a loan meant to make a 50% down payment; to agree to a loan term of 5 years or fewer; and, to make a large “balloon” payment to the bank after the mortgage’s first few years. Few U.S. consumers could meet the terms of a 1930s mortgage. Meanwhile, the government wished to increase the rates of homeownership nationwide. With more homeowners, the government reasoned, neighborhoods would stabilize and the U.S. economy would get back on track.
From this, the FHA and its flagship mortgage program was born. The main feature of the FHA-backed mortgage was its Mortgage Insurance Premium (MIP) program, a self-sufficient insurance fund through which the FHA could insure the nation’s lenders against “bad loans”. In order for a bank to get the FHA’s insurance on its loans, it was required to verify that its loans met the FHA’s minimum qualification standards. These rules came to be known as the FHA mortgage guidelines.
In time, the FHA MIP system gave banks confidence to make better loans with better terms for hopeful U.S. homebuyers. Soon, the down payment requirements for a home loan dropped; 5-year loan terms were replaced with longer terms of 15 and 30 years; and mortgage rates dropped. The FHA is currently the largest insurer of mortgages in the world.
In today’s expanding economy, U.S. homebuyers have a handful of mortgage loan options. As examples, conventional loans are available via Fannie Mae and Freddie Mac; Rural Housing Loans are available via the USDA; and, 100% loans are available via the Department of Veterans Affairs and its VA loan. Even jumbo mortgages and private loans have made a comeback of late. However, loans backed by the Federal Housing Administration remain in high demand. The FHA loan’s combination of low rates, low down payment, and flexible lending guidelines have made it one of most common loan choices for home buyers today. There are benefits to choosing an FHA loan. Here are some of the biggest.
It may seem odd to call FHA mortgage insurance a benefit since it doesn’t come for free, however, FHA MIP is what makes the FHA program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans. The good news is that, as a homeowner or homebuyer, your FHA MIP rates have dropped. Today’s FHA MIP costs are now as much as 50 basis points (0.50%) lower per year than they were in 2014. Also, you have ways to reduce what you’ll owe in FHA MIP annually including using a 15-year mortgage term for your loan; or, making a down payment of at least 5 percent.
There are many advantages to the FHA Loan Program. We will cover a few of the most attractive ones. For today’s homebuyers, there are only a few mortgage options, which allow for down payments of five percent or less. The FHA is one of them. With an FHA mortgage, you can make a down payment as small as 3.5%. This benefits homebuyers who don’t have a lot of money saved up for down payment; and, homebuyers who would rather save money for moving costs, emergency funds, or other needs. Next, the FHA is aggressive with respect to gifts for down payment. Very few loans programs will allow your entire down payment for a home to come from a gift. The FHA will.
Via the FHA, your entire 3.5% down payment can be a gift from parents or another relative, an employer, an approved charitable group, or a government homebuyer program. If you’re using a down payment gift, though, you’ll need to follow the process. Not every homebuyer will have a valid social security number and, according to the FHA, that’s okay. FHA guidelines permit loans to employees of the World Bank and foreign embassies, for example. The FHA will also insure loans for non-permanent resident aliens. Any FHA-approved lender can fund FHA loans. This includes mortgage lender, savings-and-loans institutions, and credit unions. The marketplace for FHA loans is huge, which creates competitive pressure among lenders to offer low FHA rates and low FHA fees. It pays to “shop around” on an FHA loan. Furthermore, because different banks use different methods to underwrite, your FHA loan can be declined by Bank A but approved by Bank B. If you meet the rules of the FHA, you can apply until your loan gets approved!
Another amazing advantage is access to the FHA Streamline Refinance. The FHA Streamline Refinance is an exclusive FHA program which offers homeowners one of the simplest, quickest path to a refinance. Via the FHA Streamline Refinance, there are no credit score checks, no income verifications, and home appraisals are waived completely. In addition, via the FHA Streamline Refinance, homeowners with a mortgages pre-dating June 2009 get access to reduced FHA mortgage insurance rates.
For more than 80 years, the FHA home loan program has helped U.S. homeowners purchase homes affordably and refinance them. Compare today’s rates and see what an FHA loan can do for you.
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