FHA Loans: Its Benefits and Comparison to Traditional Loans

80 Years since its establishment, FHA has helped 34 million Americans to be housed. As a branch of HUD, Department of Housing and Urban Development, FHA assisted American homeowners by providing a government-backed insurance for lenders, which eased the underwriting terms for the buyers. Here are some major benefits of FHA loan, in comparison to traditional loans:

Smaller Down Payment: You can pay as little as 3.5% as down payment which is much lower than that of traditional loans at 20%.  Even though housing prices are more expensive throughout California and especially in the Los Angeles area the FHA program still can help.

Less-than-perfect credit: FHA loans are more flexible than traditional loans for people with lower credit scores, allowing all borrowers with 500 or more credit score to pay lower down payment. People with 580 or higher can purchase with 3.5% down payment while people with credit score between 500 and 579 are required to purchase with 10% down payment. There are lots of smaller houses on the outside of the Los Angeles area, especially condo’s that can benefit from this lower credit requirement.

Sensible Underwriting: FHA loans allow people who do not appear perfect on paper to buy a house, if they can afford the loan.

Lower Interest Rate for Some People: For people with credit issue or small down payment, interest rates are usually higher. However with FHA loans the interest rate do not automatically go up.  To offset for the credit risks lenders make adjustments for various levels of down payment or credit score on conventional loans.  FHA loans do not have these same adjustments.  California loan limits are higher on FHA programs in some counties such as Los Angeles County.

Assumable: FHA loans are assumable, which allows the owner to let someone else take over their loan on a new purchase. This feature may help you in sale the home, especially if property values have increased.

Higher Upfront Mortgage Premium:  FHA loans require an upfront mortgage premium which is added to the loan amount.  Let’s say you are going to borrower $200,000 and your bank will approve you based on this loan amount, but the additional premium, say 1% will get added so you are actually making payments on $202,000.  For this reason some people don’t prefer FHA loans.  Additionally, the higher cost of the homes in the Los Angeles area eliminated many potential borrowers rom utilizing the FHA program.

Higher Mortgage Insurance Monthly:  Anytime you obtain a loan with less than 20% down you will have to pay for an insurance premium called (MIP). This insurance is for the lenders benefit and will provide the lender coverage in case you default.  With conventional loans with 10% down the average monthly insurance cost is around .5% but on FHA loans the premium cost is slightly higher.  For this reason some people don’t prefer FHA loans.

For further information about FHA programs, guidelines or current rates please visit one of our BLOG topics or contact us directly.