Thursday, May 17, 2018

Are FHA Loans Only for First-Time Homebuyers? No!

Are FHA loans only for first-time homebuyers? You can see why many would assume so. Arguably, their most attractive features are their low down payment requirement and their undemanding credit score threshold, and traditionally it’s those buying for the first time who benefit the most from those. In the “good” old days before the Great Recession, when property prices rose sharply and consistently almost everywhere, a few years of homeownership almost inevitably meant someone could graduate to a “conventional mortgage” (one not backed by the government) when they came to buy a different home or refinance.

But that was then and this is now, and today in many parts of the country owning a home is no guarantee of having either easy access to a 10 percent or 20 percent down payment, or of great credit. Indeed, in August 2016, 18 percent of all closed FHA loans were refinances, according to Ellie Mae’s Origination Insight Report for that month. No data are provided for the proportion of FHA purchase mortgages that were closed for repeat buyers, but you may want to assume there was a fair number. So, to be clear, anyone can apply for an FHA loan, no matter how many homes they’ve owned in the past.

What Are FHA Loans?

FHA loans are mortgages guaranteed by the federal government in the form of the Federal Housing Administration (FHA – hence the name!). You still borrow from a private lender, but it’s protected from most of the risk of your defaulting by that government guarantee, and that allows it to approve your loan even though you wouldn’t meet its usual requirements.

However, private lenders still retain some element of risk, which means they’re entitled to impose their own lending criteria, over and above the FHA’s minimum requirements. So, for example, even though the government says it’s happy to guarantee loans for those with credit scores over 580, some lenders are much stricter. The good news is that you can shop around for a lender that’s sympathetic to your circumstances, and in August 2016, nearly a quarter (22.45 percent) of all closed FHA loans were for borrowers with FICO scores of 649 or lower, according to that Ellie Mae report.

Another pleasant fact to emerge from that Ellie Mae report was that FHA loans tend to have lower mortgage rates than conventional mortgages, with an average FHA 30-year note rate of 3.75 percent, against 3.81 percent for conventional loans. However, the former generally come with higher long-term loan insurance costs, at least until you move or refinance, and you can find out more about those at How to Choose Between an FHA Loan and Another Mortgage.

What Are Your Options?

There have probably never been as many mortgage choices for those with limited savings for down payments and less than perfect credit. Which you go for is likely to depend on your personal circumstances and needs. For example, if your credit score is above 620, you may be able to get a HomeReady mortgage from Fannie Mae. With one of those you need only an ultra-low 3 percent down payment, which might mean you can buy a home sooner that you would if you had to save up the 3.5 percent the FHA requires. And that’s something that could make a big difference if you want to buy in an area where home prices are rising quickly.

However, that Fannie product, and Home Possible and Home Possible Advantage ones from Freddie Mac, which are similar, do come with their own rules with which you must comply. The article What’s the Difference Between FHA, HomeReady and Home Possible Advantage Loans? should help you sort out which might be best for you. Because there are so many choices in this part of the mortgage market, it can be difficult to pick the right product for you.

One final point: If you’re eligible under the Veterans Administration’s VA loans program or under the United States Department of Agriculture’s (USDA’s) home loan program, you’re very likely to get the best deal under one of those.