We represent many consumers in Bankruptcy, and getting our Clients back on their feet afterwards is a big part of what we do. Often, cases are driven by upside-down home loans or even reasonable loans in which payments have become too high because the homeowner lost their job or had to take a lower paying job as a result of the Great Recession. One option for those who’ve gone through Bankruptcy and are looking to borrow again is the FHA Loan.
Before the housing bubble burst in 2008 FHA loans were considered the choice for buyers with little credit or bad credit; or an option for those with low incomes. But since everyone’s home value began falling – often taking their credit standing with it – FHA mortgages have become more widely appealing, especially when compared to conventional loans that require private mortgage insurance (“PMI”). PMI is the mortgage lender’s way of ensuring it gets paid following default. It is insurance for which the borrower pays the premium, adding to the cost of the loan.
For those considering an FHA Loan, keep these points in mind:
1) FHA Loans are Private, But Backed by the Government
FHA loans start like any other – with an application at your local bank or mortgage brokerage. Once you qualify, the loan is made by a private entity and guaranteed (i.e. insured) by the FHA. Like PMI, this is a hedge against default. In turn the FHA charges an up-front premium as well as an annual premium – both paid by the borrower. To find a list of FHA approved lenders, search the website maintained by the Department of Housing and Urban Development.
2) FHA Loans Do Nearly Everything Conventional Loans Do
Despite the popular misconception that FHA Loans can only be used to purchase modest homes, they can actually be employed for everything from buying a $600,000+ house or multifamily building to remodeling, refinancing, upgrading, and property rehab. They even come in fixed-rate and variable-rate varieties, including ARM’s.
3) Down Payments Are Lower
No-money-down financing, once the standard in real estate transactions, was welcomed at virtually every Bank before disappearing overnight in 2008. Panicked Banks quickly overreacted by putting a virtual freeze one mortgage lending altogether. When they finally did start lending again, Banks demanded 20% down or more. By contrast, an FHA loan can be arranged with as little as 3.5% down.
4) Perfect Credit Not Needed
One thing that was true about FHA Loans before the housing crash, and remains true, is this: they are still easier to obtain than conventional loans. With a credit score as low as 580 a borrower can put only 3.5% down on the purchase of a home and qualify for a mortgage. A borrower with a lower score can still get financed if they are willing to put down about 10%. And of course FHA Loans are a great choice for those who’ve filed Bankruptcy or undergone a Foreclosure in the past few years. Borrowers just need to re-establish their credit and meet other program requirements first.
5) Property Renovations Using FHA Loans
If a borrower is interested in a home that needs a little work, they can borrow enough to cover both the purchase and the rehab using a special product known as an FHA 203(k) Loan. Likewise, the FHA’s Energy Efficient Mortgage program is aimed at upgrades that lower utility bills and make the house more energy efficient. The cost of new appliances, for instance, can be part of the loan.
6) Help With Closing Costs Available
Buying property involves several inevitable out-of-pocket expenses such as Loan Origination fees, Attorneys’ fees, Appraisal costs, etc. It is often not possible for the seller, builder, or lender to pay these costs with a conventional loan: but with an FHA loan they can. For instance, a motivated seller can offer to cover closing costs like these without running afoul of the underwriting standards of an FHA lender.
7) Which Way To Go
Despite the benefits of going FHA, borrowers could still end up paying more to borrow this way compared to a conventional loan plus PMI. Of course that assumes the FHA borrower qualifies for a conventional loan. Either way, these days the premium charged by FHA in lieu of PMI is 1.75% of the loan value up-grant, plus an annual premium of up to 1.35% of the loan amount. Borrowers should talk to their mortgage adviser before deciding which way to go on this.
An FHA mortgage is something that many borrowers don’t even consider. If you have experienced a Bankruptcy or Foreclosure, put FHA loans on your list of ways to consider getting back into home ownership, or just as a way to improve your living conditions.
Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.