Why FHA loans may become less popular
February 8th, 2013
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FHA-insured loans have been available since the 1930s, when they were introduced to assist low- and moderate-income families to become homeowners. Just 3.1 percent of all home loans were FHA-insured in 2005, at the height of the housing boom; but in 2011, 34 percent of all new mortgages were FHA 203(b) loans. In December 2012, Ellie Mae says that FHA loans dipped to 19 percent of all new loans. New regulations have increased the mortgage insurance requirements of these loans over the past few years. At the same time, some mortgage lenders are beginning to offer home loans to qualified borrowers with down payments of 5 percent, not much higher than the FHA requirement of 3.5 percent down.
New changes to FHA guidelines that go into effect April 1, 2013 and June 3, 2013 include:
- Higher mortgage insurance premiums.
- Mortgage insurance paid for the life of the loan if the initial loan-to-value is 90 percent or less.
- Borrowers with a credit score under 620 will be required to have a debt-to-income ratio lower than 43 percent.
- Loans of $625,000 to $729,000 will require a down payment of 5 percent.
FHA loan advantages
In spite of these higher costs, there are several reasons many borrowers may still prefer an FHA loan for a home purchase or refinancing:
- Lower down payment and equity requirements. FHA loans require a down payment of just 3.5 percent of home equity or 2.75 percent for homeowners, compared to minimum down payments of 5 percent and home equity of 5 or 10 or more percent by conventional lenders.
- Lower credit score requirements. FHA lenders often accept borrowers with a credit score as low as 620 or 640.
- Gift allowance for down payment funds. FHA guidelines allow the entire down payment to come from a gift rather than the buyers’ own funds.
- Qualification guidelines are looser. FHA lenders often allow a higher debt-to-income ratio or lower cash reserves than conventional lenders.
Consult with FHA-approved lenders to find the best FHA rates.
Michele Lerner
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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