why FHA is an amazing product for clientsIs FHA DEAD?
With so much hoopla surrounding changes “made” to FHA over the last few months, I want to touch on a few items before I address other misconceptions.
The FHA loan is a loan that you get from a mortgage lender that is guaranteed by the Federal Housing Administration. My very first loan was an FHA loan. FHA loans have long been misunderstood by home buyers and Realtors so it is crucial it’s better understood, especially given our current circumstances.
Firstly, FHA has not changed their guidelines. However, as a response to market changes surrounding Covid-19 (see my earlier newsletter about these specific impacts), many mortgage lenders added “overlays” to the product to prevent further losses. This included much higher credit score requirements, more verified assets, and lower thresholds for debt ratio (the % of your income that you are allowed to use to qualify). The key here is that I said “many” and not “all”. As a mortgage broker, we have over 50 lenders to choose from. Some are operating with no FHA changes at all. Meanwhile, people are calling saying that they were working with another lender that told them there’s no more FHA. Unfortunately, some loan officers don’t know there are still options out there, so it isn’t their fault. FHA is indeed alive and well. Like everything else the pendulum will start to swing back in the other direction and these overlays will become a thing of the past.
Second, is a Conventional mortgage better than an FHA?
Is a Conventional buyer better than an FHA buyer?
For years, too many to count, I have Realtors tell me they took an offer for a Conventional buyer over an FHA because they’re more qualified. I’ve had clients ask me for a Conventional pre-approval with no seller concession to help get their offer accepted. If everyone knows that FHA is easier to qualify for and less strict, doesn’t that make it inherently easier for that person to consummate the transaction?
Let’s review the tale of two clients. Client A has a 740 credit score, has a job paying him $75k a year, and $25,000 in the bank. He opts for an FHA loan with a 3.5% down payment, 3% interest rate, and a seller concession for closing costs to stay as liquid as possible. Client B has a 680 score, 10% down, no seller concession, makes $35k a year, and will be using all his funds to get into the new mortgage. Which one is actually the better client? The one that utilized a mortgage product to their financial advantage or the one that just had the word “Conventional” on their pre-approval letter. Which one will be in a better financial position a year from now, five years from now, ten years? Is it Client B who wiped out their entire savings to buy a home? Or Client A who retained his funds so he has a cash cushion should hard time befall him? Is this the case all the time, certainly not. The point is that the type of loan doesn’t dictate the strength of the borrower, the quality of the research in the pre-approval does.
Some quick bullet points on why FHA is an amazing product for clients:
- Lower down payment than most Conventional mortgage products
- Easier to qualify for with credit
- Easier to qualify for with income
- Fixed mortgage insurance that doesn’t vary from one lender to the next
- Rates are almost always lower
- Higher threshold for seller concessions (up to 6% of purchase price)
- Flexibility with student loan debt
What’s the best loan for you or for your clients? Only one way to find out and I’m looking forward to hearing from you.
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