David Kim: Can you briefly explain FHA financing and how it differs from conventional?
Jennifer Ellison: The Federal Housing Administration was established by the government in the 1930s to help struggling homebuyers during economic hard times. Its purpose was to help people finance a home purchase at low interest rates with a minimal down payment, and is considered one of the most successful federal programs in history.
FHA has since re-emerged in response to our current economic slowdown to provide an alternative to the increasingly restrictive conventional financing of Fannie Mae and Freddie Mac. FHA is really an incredible opportunity for first-time homebuyers and move-up buyers alike. Some of the benefits of FHA include a low 3.5 percent down payment, lower interest rates than conventional financing, and more leniency on income and credit.
DK: How do interest rates differ from conventional loans? Why?
JE: It’s really a question of risk. Since the federal government guarantees all FHA loans, rates are lower because lenders don’t assume the burden of buying back loans that go into default. Lenders who sell conforming, conventional loans to Wall Street are often required to buy back or pay a significant penalty on loans that default. Lenders price FHA loans with lower rates because they assume no financial risk.
DK: Some say FHA loans are more difficult to close. Is this really the case?
JE: I believe that is really a misconception. The truth is that most borrowers qualify more easily with FHA than conventional loans. FHA underwriters are allowed to use a certain amount of discretion and common sense when approving FHA loans. Conventional underwriters are required to follow very strict guidelines. If a conventional loan does not fit these guidelines, the loan is denied. Conversely, appraisal requirements are a bit more strict with FHA than with conventional financing. A property must be clear of any health and safety issues under FHA rules.
DK: What does a borrower need to qualify for an FHA loan (i.e. down payment, FICO score, financials, etc.)?
JE: Typically a borrower must have a minimum FICO score of 620, a down payment of 3.5 percent, a stable work history and sufficient income. Try to imagine that the federal government really wants to lend through FHA, and Fannie Mae and Freddie Mac, who have both suffered tremendous losses in recent years, really don’t.
DK: How can someone find out more about FHA financing?
JE: The most informative Web site is www.fha.gov. Look for sections on “most frequently asked questions” and “requirements” to guide you. The next step is to be educated by your FHA-approved mortgage professional. Not all banks or direct lenders are FHA approved, so make sure you speak to someone who is.
— David Kim is a Realtor with Village Properties.