Is FHA Still a Good Loan for First-Time Homebuyers?
Not too long ago, 50% of first-time home buyers used Federal Housing Administration (FHA) insured loans for their financing needs. However, with FHA making several changes to their mortgage insurance premium (MIP), homebuyers are now more inclined to use conventional financing.
Recent changes to FHA loans
FHA made two sweeping changes to their rules pertaining to MIP payment. The MIP has been steadily rising for last 2 years. From a base rate of 55 basis points for annual MIP (calculated as 0.55% of the loan amount), the rates are now as high as 135 basis points (calculated as 1.35% of the loan amount). If you are getting a $400,000 loan, that’s an increase of $267 per month in MIP payment.
And if you hoped to get rid of that expensive mortgage insurance, it’s not happening anytime soon. Earlier, FHA allowed homeowners to get rid of MIP after a mandatory period of 5 years, as long as the borrower met other terms.
With rules that changed last year, in most cases, borrowers will have to keep the MIP for the life of the loan. Read more about this in “FHA to Raise Mortgage Insurance Premium, Require Payment for Life of the Loan.”
FHA also made changes to its loan limits for 2014. Earlier, in some high-priced counties, it allowed financing up to a maximum of $729,750. That was lowered to $625,500 for 2014, same as conforming loan limits.
Conventional financing options
On the other hand, MIP rates for conventional loans have gone down in recent months. Also, more and more lenders are offering low down payment loans.
If you have above average credit, you may qualify for a down payment of only 5%, if you are borrowing a loan amount of up to $417,000. Also, creative financing like 80/10/10 loans, help you qualify for a much larger loan with only 10% down payment.
Is FHA still a good option?
Even with all the unfavorable changes, FHA can be the right loan program for you. It still offers some benefits over conventional loans. Let’s look at some benefits that still make FHA a suitable loan option:
- Credit score as low as 580. However, most lenders require a minimum of 620.
- Down payment as low as 3.5%.
- The entire down payment can be received as a gift.
- Interest rates typically 0.25% to 0.50% better than conventional 30-year fixed rates.
- Non-occupying co-borrower allowed. This means that parents can buy a home for their children even if the latter has no income. The reverse could also be true for children to buy a house for their parents.
As is usually the case for something as complex as home financing, there is no “one-size-fits-all” answer. Evaluate the information above to figure out which loan option works better for you. Be sure to consult an expert loan officer, who can help you compare all the loan programs and recommend the one that’s best suited for your needs. For more mortgage updates and tips visit the Homes.com Idea Gallery.