FHA loans are a great tool that allows many potential first time homebuyers with past credit problems to break into the housing market. Prices are low and seller concessions are high in the today’s real estate buyer’s market. However, many of the subprime mortgage 100% financing deals are gone. FHA is the only way for many prospective buyers to get a mortgage. Also hundreds of thousands of homeowners who bought homes over the past few years using those subprime mortgages are now facing interest rate increases of 3 to 5 percent or more! Five minutes of watching business news lately will easily explain why these people don’t believe they still have any mortgage options left.
Here are 5 myths about FHA loans that prevent many from trying.
1. FHA loans take longer to get approved.
The truth is that in today’s world of automated underwriting and paperless processing, FHA loans take no longer than conventional loans to close if you are being helped by a loan officer who understands FHA loans.
2. FHA loans require a lot of extra paperwork.
The documentation required for an FHA loan is almost exactly the same as that required for a conventional loan. FHA requires only a few extra documents more than a conventional loan, and the extra documents that FHA requires take little extra time and are there to protect you during the process.
3. FHA loans cost more than conventional loans.
FHA loan interest rates are based upon the same market factors that conventional rates are based on. As a matter of fact, even when considering the FHA mortgage insurance premiums added to your payment, FHA loans are often less expensive than conventional mortgages for first time borrowers and borrowers with past or even present credit problems.
4. FHA required mortgage insurance is too expensive.
All mortgages above 80% of the value of the property being financed require mortgage insurance which pays off a portion of the loan if the borrower defaults. Prior to the invention of mortgage insurance programs, lenders all required 20 percent down payments to obtain a mortgage. FHA’s mortgage insurance program does require a 1.5% upfront mortgage insurance payment which is automatically added to your loan, and .50% per year which is divided up and added to your monthly payments. This is actually very inexpensive compared to conventional mortgage insurance rates which take effect October 1, 2007 which can require almost 3% per year in mortgage insurance to be added to the the typical borrower with lower credit scores!
5. FHA loans have very restrictive guidelines.
In fact, the exact opposite is true in many respects. Although FHA loans have lower maximum loan amounts than conventional mortgages, they don’t have the income restrictions placed on Fannie Mae and Freddie Mac community lending products. Getting an FHA loan with limited or no credit history, or credit problems is much easier than obtaining a conventional mortgage. FHA allows for manual underwriting. This means that if the automated underwriting system does not approve your loan, an underwriter can actually look at your file and determine if common sense dictates that you would be able to afford the mortgage. The underwriter can approve your loan even if the automated system turned it down. Manual underwriting is common for FHA loans and very rare for conventional loans. In addition, if interest rates go lower, FHA loans allow for a streamlined, no requalifying refinance process.