July 11, 2017
When is an FHA loan better than a conventional loan? Many potential FHA borrowers ask this question. Do you know how FHA loans stack up against their conventional loan counterparts?
Purchase And Refinance
The FHA Single Family Loan program features loans for both new purchases and refinancing. If you are considering a refinance loan in your home buying strategy, an FHA mortgage may be the right move for you. If you buy FHA and refinance FHA, you can take advantage of the FHA-to-FHA only Streamline Refinance loan to get into a lower mortgage payment and/or interest rates. We’ll cover the refinancing aspect of FHA mortgage loans more closely in another blog post.
FHA Loan Interest Rates
FHA home loans feature interest rates that are often competitive with their conventional loan equivalents. Since the government backs an FHA home loan, there is less financial risk for the lender, and the lower interest rates make buying a home more attractive, especially for first time home buyers who may not be able to afford higher rates over the term of the mortgage.
Compare any business day’s FHA loan rate data with the same day’s interest rates on a 30-year fixed rate conventional mortgage-you’ll see how much lower FHA loan rates can be. On some more rare occasions conventional rates might be close to FHA loan rates, but in general the FHA rates are reported lower.
When doing your home buyer’s research in this area, it’s important to understand that as a federal agency, the FHA does not set or regulate mortgage rates, nor does it have any say in the movement of those rates on a day-to-day basis. Mortgage loan interest rates may be affected by headlines, investor reaction to those headlines, breaking news, or economic issues.
The rates you see today may not be the same rates as you find tomorrow. Furthermore, your FICO scores and other financial qualifications will play an important role in your access to certain home loan interest rates. Your experience may vary depending on these factors.
FHA Loan Down Payment Requirements
When is an FHA loan better than a conventional mortgage? One important area is the down payment requirement. While borrowers can rightfully expect down payments on conventional mortgages as high as 10% or better, the FHA loan handbook states that for qualifying applicants with FICO scores 580 or better, the FHA loan down payment requirement is 3.5%.
FHA loan down payments are calculated using the adjusted value of the home and have strict requirements about the sourcing of down payment funds. Your lender will be tasked with verifying the source of your down payment funds to make sure they meet FHA guidelines and don’t come from non-collateralized loans, “gifts” from others that actually have an expectation of repayment, or come from any source that may have a financial stake in the sale of the home.
FICO scores and other financial qualifications can play a part in the amount of the down payment you are to make-ask your participating FHA loan officer to give you information on that lender’s FICO score requirements (which may exceed FHA loan program minimums).
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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