I recently closed a couple deals involving FHA financing and get questions about this loan program all the time. For those of you asking what exactly an FHA loan is, it’s a fair question. Essentially the “FHA” stands for Federal Housing Administration and these loans are a product introduced as part of the New Deal in the 1930s. (Full history here) Historically, this was an offering for lower income borrowers (or more risky) who would otherwise be unable to get financing. In a nutshell: It’s federal assistance. These loans come with some pros and cons and while I won’t unpack all of them here, here are the broader strokes.
Lower credit limits – As stated above, these loans are designed for those with non-stellar credit and often have other debts. FHA loans are composed in such a way that offsets some of those risks which I will describe in the CONS section
Lower down payment requirements – Often FHA loans only require 3.5% down which is a great way for borrowers to hold on to their cash. Conventional loans usually call for at least 5%+ down payment.
DTI (Debt-to-Income) Requirements – Many conventional loan programs require a mix of overall debts to overall income ratios at a certain level. FHA is able to look the other way in some cases and sneak borrowers in with less the prime ratios.
High Income Borrowers – These people can still qualify for these loans. A reputation associated with FHA is that it is only for poorer borrowers but I have had many clients who make well over $100,000 who have utilized this loan product.
Higher Mortgage Costs – Borrowers usually are forced to pay what called “MIP” which is mortgage insurance premiums. This is both upfront and an ongoing monthly cost. So while you can get in cheaper on the front end, the higher monthly costs can be prohibitive
Appraiser repairs – FHA appraisals are a bit different in that they can call for certain repairs which are associated with safety. They will make sure there are GFI outlets near water sources, handrails, smoke/CO2 detectors in the home, no peeling paint (on homes built before 1978) etc. FHA does this ensure the property is up to its own standards. Conventional is much less concerned with these items if at all.
Lower loan limits – So currently the loan limit in PA is $431,25 for FHA. This means that if you’re putting down only 3.5% you are gonna be hard pressed to purchase anything much above $450,000. In most markets, that is a sizeable home and keep in mind it varies by location. For example, it is currently $822,375 in Los Angeles County, California.
Unpacking this loan program further is best left to your lender, but these are the bullet points I wanted to highlight. FHA financing can be a great tool for those who really wish to purchase a home, but have had a tough run recently or getting their financial act together. My team and I have a stable of lenders who do these loans all the time and happy to connect you if you think this loan program is right for you.