Top 10 FHA Loan Advantages
Fannie Mae and Freddie Mac underwritten conventional, FHA (Federal Housing Administration) and VA (Veterans Administration) loans account for the vast majority of mortgages chosen by buyers to finance their home purchase. While buyers have the choice on which product to use, there are some considerable advantages to FHA.
1. More tolerant for credit challenges than conventional loans.
2. Lower down payments than conventional loans.
3. Broader qualifying ratios – total house payment with MIP can be up to 31% of borrower’s monthly gross income and total house payment with all recurring debt can be up to 43%.
4. Seller can contribute up to 6% of purchase price – this money must be specified in the contract and can be used to pay all or part of the buyer’s closing costs, pre-paid items and/or buy-down of the interest rate.
5. Self-employed may qualify with adequate documentation – two year’s tax returns and a current profit and loss statement would be required in addition to the normal qualifying and underwriting requirements.
6. Mortgage Insurance Premium can be released in five years when the balance is 78% of original sales price
7. Liberal use of gift monies – borrowers can receive a cash gift to assist in purchase from family members, buyer’s employer, close friend, labor union or charity. A gift letter will be required specifying that the gift does not have to be repaid.
8. Special 203(k) program for buying a home that needs capital improvements – requires a firm contractor’s bid attached to the contract specifying the work to be done. The home is appraised subject to the work being done. If approved, the home can close, the money for the improvements escrowed and paid when completed.
9. Loans are assumable at the existing interest rate – assumptions require buyer qualification but are actually easier than qualifying for a new mortgage. Closing costs are lower on assumptions than originating a new mortgage.
10. If the rate on the assumable mortgage is lower than current rates for new mortgages, it could add value to the property.