June 13, 2024

FHA Mortgage Financing Is The Only Option For Many Borrowers

One of the primary factors when choosing between an FHA mortgage and a Conventional mortgage is based upon the amount of down payment required.  New home purchasers with less than a 20% down payment usually decides that an FHA loan is the most viable and cost effective option.

Traditionally, mortgage borrowers who have less than a 20% down payment require PMI (private mortgage insurance). The decline in residential real estate values and large number of mortgage defaults have resulted in substantial losses for the mortgage insurance (MI) companies that insured loans with a loan to value (LTV) of greater than 80%.  Determined to avoid future losses, many MI companies have reacted by overcompensating for the risk of future losses. The MI companies have enacted stringent underwriting guidelines by raising required minimum FICO scores and increasing premiums for 90% or greater loan to value mortgages.  In many cases, borrowers whose credit scores have been diminished due to economic hard times are no longer eligible for mortgage insurance with conventional mortgage financing.

For borrowers without a large down payment or less than excellent credit scores, the FHA becomes the only financing option available. This is why FHA mortgage lending has seen such a huge increase in market share over the last few years.  FHA loans are government backed and covered by borrower paid insurance premiums that are paid upfront and on a monthly basis. The insurance premiums allow the FHA to approve more loans for the hard working American middle and lower income borrowers.

FHA mortgages require only a 3.5% down payment compared to a minimum of  5% for conventional financing.  FHA also allows for significantly lower FICO scores and often requires little or no reserves at closing.  FHA also allows common sense manual underwriting that allows a mortgage to be approved based on compensating factors that cannot be properly assessed by an automated underwriting system.  By contrast, most conventional mortgage lenders will not allow manual underwriting on conventional mortgage.

FHA financing is also the best choice for most borrowers since the FHA does not impose hefty risk based fees based on loan to value, the borrower’s credit score or type of property.  By contrast, conventional loans from Fannie Mae or Freddie Mac impose numerous fees and rate adjustments on conventional mortgages unless you are the “perfect borrower” with a mid FICO score over 740 and have ample home equity and cash reserves.  If you are not the “perfect borrower”, Fannie and Freddie impose “risk-based loan level pricing adjustments”, resulting in higher interest rates and thousands of dollars in fees.

The high cost or unavailability of conventional mortgage financing for many borrowers has resulted in many people turning to the FHA when making their mortgage decision. When it’s all said and done your monthly payment with an FHA loan works out to be the same or less than conventional financing since the FHA does not impose the numerous price and rate adjustments frequently seen with conventional financing.  In addition, the FHA mortgage program has the lowest down payment requirements.  Of course, the biggest plus with going FHA, depending on your circumstances, is that you have a much better chance of obtaining a mortgage approval.

FHA refinances also have some great benefits as they offer maximum loan to value when refinancing which really helps in a declining market.  FHA allows 85% cash out versus 80% for conventional loans.  FHA also offers somewhat higher debt to income (DTI) ratios, sometimes exceeding 50% when compensating factors exist. Conventional loans are generally declined if the DTI exceeds 45%.  This could be the difference between being approved versus declined on a mortgage refinance.

When buying or refinancing a home, be sure to work with a Loan Officer who specializes in both conforming and FHA loans.  A qualified Loan Officer will fully understand underwriting guidelines that determine loan eligibility.  Borrowers should question the Loan Officer about his/her credentials and also ascertain that the individual has been licensed or registered by the Nationwide Mortgage Licensing System & Registry (NMLS).

All loan originators must now be properly licensed/registered with the NMLS.   A consumer can easily verify that a mortgage company or individual is properly licensed by going to the Consumer Access page on the NMLS website.  Working with a fully qualified and licensed Loan Officer is your first important step in obtaining the best financing option.