Let me start by saying there’s nothing wrong with having an FHA insured mortgage. FHA mortgages have been a resource for first time home buyers and borrowers who lack significant down payment since their inception 40 years ago…. BUT with the increases to the upfront and monthly mortgage insurance premiums and the reduced loan limits, many borrowers could be better off considering loans other than FHA.
When I’m working with a home buyer who’s considering an FHA mortgage, here are some of the other mortgage programs I suggest they consider:
Home Advantage. This is a program that is offered thanks to the Washington State Housing Finance Commission. This conforming mortgage will allow home buyers to put down as little as 3% and has down payment assistance available at 0% interest with payments deferred for 30 years! Plus, if the borrowers have good credit, the private mortgage insurance is greatly reduced. Not to mention, the mortgage insurance on a conventional loan will eventually drop off when the home reaches 80% loan to value. Home buyers often wind up with lower payments, less money out of pocket when compared to FHA. The only catch? Borrowers need to attend a home buyers education class and need to make less than $97,000 per year. PS: if there is more than one income in the household causing you to exceed the $97,000 limit, a borrower’s income may be not used on the application as long as they still qualify with the single income. The commission has other programs that may be worth considering too!
Freddie Mac’s Home Possible. This program allows for 5% down payment, which like FHA, can be a gift from family. This program also features greatly reduced mortgage insurance premiums. The catch? This program has income limits UNLESS you’re buying in a targeted area.
Fannie Mae HomePath. This is a great program that will go as low as 5% down payment. There is no private mortgage insurance with scores over 680 and appraisals are not required. The catch with the program is that the home must be a Fannie Mae owned property (foreclosure) and offered by Fannie Mae as part of their HomePath program.
USDA Rural Loans. USDA offers 100% financing and currently has much lower mortgage insurance (it’s called a guarantee fee) than FHA. Payments are often less than an FHA loan and there are less funds due at closing. The only catch… there is an income limit which varies per county and the property must be in a designated rural area. If you’re considering buying a home in Seattle, this program won’t work…but if you’re considering Duvall or Carnation, you’ll want to check out this program.
VA Loans. VA loans are available to eligible Veterans and offer 100% financing up to certain loan amounts per county and reduced down payments when those loan amounts/sales prices are exceeded. There are no income limits and no “mortgage insurance” which means lower payments and often less down payment than FHA.
So who would want an FHA loan today?
This program will remain popular with borrowers who exceed income limits and have less funds available for their down payment or closing cost.
FHA is also worth considering for home buyers who qualify for the Back to Work program and/or who have had a short sale or foreclosure as the wait periods are shorter.
If you are considering an FHA loan, make sure you ask your loan originator what your other possible options may be. If you’re buying a home anywhere in Washington state, I’m happy to review your options.