FHA Financing - Advantages and Disadvantages
ADVANTAGES: LOW CASH OUTLAY FAVORABLE INTEREST RATES LOWER PAYMENTS BUYER CAN QUALIFY FOR LARGER LOAN AMOUNTS FHA LOANS ARE FULLY ASSUMABLE NO PREPAYMENT PENALTY STREAMLINED REFINANCE PROGRAM: DISADVANTAGES: SOME SELLERS FEAR FHA APPRAISALS LOAN PROCESSING TIME FHA MAXIMUM LOAN AMOUNTS TOO LOW COPYRIGHT © JEFF ELIAS 2010 Page 38 FHA Fixed Rate Section
LOW CASH OUTLAYThe downpayment required on FHA loans Is usually lower than on conventional loans and the buyer's closing costs are generally lower on FHA loans than conventional loans. The FHA buyers may make a cash investment as low as 3% of the sale price in some instances.
FAVORABLE INTEREST RATESTraditionally, FHA interest rates were lower than conventional rates, but with today's "floating interest rate" the rate can be negotiated between the buyer and the lender. Also, 30 year fixed mortgages are widely available through FHA lenders, when some conventional lenders only want to make adjustable rate mortgages. FHA's graduated payment mortgages and adjustable rate mortgages carry lower initial payment rates for the buyer.
LOWER PAYMENTSFHA buyers desiring very low initial mortgage payments may select a graduated payment mortgage plan. This plan can reduce the buyer's payment by up to $500 in the first year and reduce the "effective interest" or "payment rate" by 3½% interest initially. The buyer's payments would gradually increase for 5 years and then level out in the sixth year of the loan. (FHA adjustable rate mortgages are also available at 1½%-2% below fixed rate mortgages.)
BUYER CAN QUALIFY FOR LARGER LOAN AMOUNTSWhile the regular FHA qualifying formula is similar to conventional loan qualifications, FHA does not require minimum credit scores like conventional lenders. In addition, the FHA graduated payment program allows some buyers to qualify for up to $50,000 larger loan amounts due to the greatly reduced first year payment. (The buyer is qualified on the first year payment only.) In addition, FHA has liberalized their traditional income and debt ratios. Present income ratios are 31%, with debt ratios at 43%. Underwriters are also giving 2% extra income and debt ratios for "Energy Efficient Homes", making the ratios 33%/45%
FHA LOANS ARE FULLY ASSUMABLEFHA loans made before December 1, 1986 are fully assumable. That is, a buyer could assume these FHA loans without having to qualify or pay new buyer's costs. The seller could sell on an assumption and not worry about the house appraising for the sale price, as no appraisal is required. In addition, the seller wouldn't have to pay any discount points as with new loans and the closing can be speeded up dramatically on assumptions. These FHA loans may also be "creatively financed" by the seller using second mortgages, contract for deed, lease purchases, etc. FHA loans made after December 1, 1986, have a partial due on sale clause that requires qualification if the loan is assumed during the first two years or two years after subsequent assumption. On February 1, 1988, FHA modified the partial due on sale clause to one year for owner-occupants, two years for investors. After this time the loans revert to being fully assumable. FHA loans made after December 15, 1989 require qualification on the assumption and may not be assumed by investors.
NO PREPAYMENT PENALTYFHA loans do not have penalties for paying off all or part of the loan before the scheduled term. This feature also gives the FHA buyer the opportunity to refinance the loan to lower interest rates if rates decline (with some additional costs involved in refinancing).
STREAMLINED REFINANCE PROGRAM:FHA buyers may refinance without re-qualifying and an appraisal, if they refinance to a payment lower than they previously qualified for.
SOME SELLERS FEAR FHA APPRAISALSThere are some sellers and real estate sales people who would prefer not to sell their homes to buyers seeking new FHA loans. This stems from past appraisals which were lower than the sale price or had extensive repair requirements. While the appraisals still may be a roadblock in some areas of the U.S., FHA now uses independent "fee" appraisers rather than FHA "staff" appraisers, which has eliminated many of the discrepancies.
LOAN PROCESSING TIMEFHA loans generally take about 2 weeks longer to process and close than conventional loans. Normal FHA processing time is 4-6 weeks, compared with 2-4 weeks for conventional loans. However, many FHA lenders are now approved for automatic loan approvals which can speed up processing substantially.
FHA MAXIMUM LOAN AMOUNTS TOO LOWIn some areas of the U.S. the housing costs are much greater than FHA's maximum loan amounts, thereby limiting the use of FHA loans to medium and lower priced housing.
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