FHA loan options for high-cost housing
September 12th, 2012
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FHA lenders qualify borrowers based on their ability to repay the mortgage and the value of the property, not whether they are first-time buyers or meet income requirements. The government-insured loans do have established limits set by Congress each year, but FHA loan limits are actually higher than the loan limits established by Fannie Mae and Freddie Mac in 2012 in areas with expensive housing. For example, in Washington, D.C., conforming loan limits are capped at $625,500, while buyers and homeowners who are refinancing in that area can borrow up to $729,750 with an FHA loan.
FHA loans and high-income borrowers
A recent study by the Center for Real Estate and Urban Analysis of the George Washington University showed that more than 30 percent of the mortgages insured by FHA in 2010 were approved for households with an income higher than 115 percent of area median income. The FHA Assessment Report also showed that within that 30 percent of FHA-insured loans, more than half were issued to borrowers making more than 150 percent of their area’s median income.
When introduced in the 1930s, FHA guidelines were meant to provide mortgage financing for first-time, low-income and minority buyers. However, in 2011, the FHA Assessment Report shows that 54 percent of FHA loans were issued for properties with values greater than 125 percent of their area’s median value as compared to just 15 percent in 2007.
FHA loans for refinancing
While FHA requirements such as a down payment of just 3.5 percent clearly benefit home buyers, these loans can be equally appealing to homeowners who face refinancing challenges because they have credit problems or minimal equity in their homes.
Conventional financing typically requires a credit score of 720 or 740 or higher to get the best mortgage rates, while FHA lenders generally approve borrowers at the same interest rate as long as their credit score is higher than 620 or 640.
Borrowers who already have an FHA loan, may qualify for a streamline refinance with reduced documentation. Borrowers with a conventional loan can also benefit because FHA loans require as little as 3.5 percent in home equity.
The disadvantage of these loans is that all borrowers must pay mortgage insurance, which will increase their monthly payments. All borrowers should compare conventional and FHA loan options before choosing the appropriate mortgage.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.
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