I get asked all the time about whether people should use an FHA loan or not. The answer is, as with most things in real estate, it depends! First and foremost is the issue of whether you have enough down payment to NOT use an FHA loan. The minimum down payment you can have for a non-FHA loan is 10 percent, and you need a FICO score of over 720 to even be considered for that program. Under that FICO score, your only options are 20 percent or more down or FHA. With an FHA loan, you can buy a home (note the word HOME — you must live in the property) for as little as 3.5% down.
FHA loans are limited, like other GSE (Government Sponsored Entity) loans like Fannie Mae and Freddie Mac, to the upper loan limit currently in effect. As of this post, the loan limit in our area is $729,750, although if Congress doesn’t act soon, it will go to $625,500 on October 1, 2011. So if you consider that you were to borrow the maximum of $729,750 with 3 percent down, you will see that you could get a home of approximately $756,000 with under $27,000 down.
The other advantage to FHA loans is that the down payment can be a gift and you can have a co-signer that is not on the title, such as parents. This makes it possible for young couples starting out to buy a place instead of renting and to be able to build their real estate wealth sooner than they would have otherwise.
The drawback to FHA loans is MI and MIP — Mortgage Insurance and Mortgage Insurance Premium. These are an upfront payment that you have to make (though it may be added to the loan balance) and a monthly payment you make as well, which increases your effective interest rate. However, with all interest rates at record lows and with prices there also, this is a small price to pay if it allows you to get your foot in the door of the housing market when you otherwise would not have the down payment. Once you get to a debt to equity ratio of .8 or less (when your new home appreciates in value) you can petition to have the MI eliminated.
FHA loans are not available for every property. There are guidelines that must be met, such as appropriate sanitation, heat and cooking facilities, so these won’t work for those short sales where someone has ripped out all the appliances and fixtures. It also is not always applicable to “condominiums” which legally include the many townhome style complexes we have in the South Bay, such as two and three on a lot type projects. If a property is completely detached, it can be covered. If it is attached to other units, however, then the entire complex either has to be on an approved list (see this website here) or else the whole complex has to BE approved, which is harder to do. Finally, even in an approved complex, there are percentage limits to how many of the units can already have FHA loans.
Negotiating the many ins and outs of FHA loans versus property type is one of the many reasons why you need to work with a knowledgeable REALTOR®! Let me know if I can help you figure out how to leverage Uncle Sam’s loans and help get your own piece of the South Bay real estate market! And if you need a lender who can get these loans done without a huge hassle, visit my recommended lenders page.