Ask Our Broker With Peter G. Miller: FHA or Other?
Question: We hope to buy a first home during the next few months and thought we would use FHA financing. However, our lender says we might be better off with a conforming mortgage. We thought FHA loans were the go-to financing for first-time buyers like us, so why the suggestion to use something else?
Answer: The obvious problem is that most people do not have big down payments, especially those at the start of their careers. According to the National Association of Realtors, in 2016 repeat buyers typically put down 14 percent while first-timers purchased with just 6 percent up front.
To get past the down-payment hurdle first-time buyers often purchase with mortgages backed by some form of insurance. For example, there are traditional loans with little down such as FHA-backed financing from HUD (3.5 percent) and VA loans (0 down) as well as newer options such as Freddie Mac Home Possible Mortgages (3 percent), and Fannie Mae HomeReady loans (3 percent).
Which is best for you? You have sit down with a loan officer and compare each program. For instance, what are the credit score requirements? Allowable debt-to-income ratio? Up-front and annual mortgage insurance costs? Interest rate?
And, no doubt, the new programs are getting more marketplace traction. According to June data from the Ellie Mae Millennial Tracker, “63 percent of all closed loans made to Millennial borrowers were conventional loans for an average amount of $205,066. Thirty-two percent of closed loans were FHA loans for an average amount of $173,381.”
However, behind the scenes, some lenders increasingly don’t like the FHA program. The problem is not the amount down, insurance costs or other borrower requirements. Instead, in processing large numbers of loans, mistakes are made. There are big mistakes and little mistakes – think about all the paperwork required for a mortgage application, some 500 pages in a typical application according to a 2014 report from Virpack. Many lenders believe HUD is overly harsh in penalizing lenders under the False Claims Act of 1863 when small or technical mistakes are found – mistakes that may not result in federal losses.
As a borrower your goal is to get the best financing for your situation. If your loan officer thinks something other than FHA financing is right choice for you, that’s fine – but make sure there are objective reasons for the lender’s recommendation such as a lower cost or more liberal qualification standards.
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Peter G. Miller Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.