Most of the articles we see about advantage and disadvantages of an FHA loan concern the low down payment, or higher qualifying ratios, or lower FICO scores. And there is discussion about the costs of mortgage insurance premiums. But rarely do we see very much written about some of the advantages of an FHA mortgage down the road. So since so much has been written about "getting" an FHA mortgage, I will skip that part, with one exception.
First the exception: Having a higher qualifying ratio is proclaimed as an advantage of an FHA mortgage. In fact it might be a disadvantage. Allowing a higher percentage of income to be devoted to a mortgage payment means that the buyer/borrower is sometimes encouraged to get into a more expensive home than what they can comfortably afford. What if there is unemployment, disability, injury, sickness or one of those life events that can put us into financial challenge? Being obligated to make that larger payment might make the difference between being a homeowner and being an ex-homeowner. End of rant.
So here are some hidden advantages of an FHA loan. (No, they aren't really hidden, they just don't receive as much emphasis.)
- An FHA mortgage is assumable. The person assuming the loan must still go through a qualification process. If the interest rate on the assumable loan is lower than current market rates, assumability can be a huge advantage is helping to get the home sold.
- Streamline refinancing. Let's say that you bought your home a few years ago, but it is now worth less than what you owe (being upside down or underwater.) Many homeowners would find it difficult to take advantage of today's unbelievably low interest rates, because they would need a new appraisal in order to refinance. With the FHA streamline program, if a homeowner has been current on their mortgage payment, they might qualify for a refinance that does not require new appraisals, income verification or other documentation. A streamline FHA refi can not only be quicker and less expensive than a conventional refi, it might be possible where the conventional refi might be impossible.
- Pre-Foreclosure Sale (PFS) Program. We have all heard stories about the nightmares involved in short sales. You have time delays, overworked asset managers, and sometimes illogical decisions. But for people who hold FHA mortgages, there has been a well-defined procedure that permits the homeowner to sell for an amount that is close to the current market value, regardless of the amount owed on the FHA mortgage. If somebody does have a hardship and needs to sell, the Pre-Foreclosure Sale program can often get this accomplished in timeframes stipulated by FHA.
So what if you can afford another way to finance? Should you consider an FHA mortgage anyway? There is no one-size-fits-all answer to that type of question. But if would be good to understand the total picture beyond the interest rate and initial costs of a mortgage when making your decision.
For people looking for a home in the Indianapolis area, give us a call. While HUD Homes and foreclosures are not the only market we work with, call us if you want an agent who will show you the full range of homes available on the market. Call or visit our website about Indianapolis HUD Homes and foreclosures.
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