I don’t know if you’ve heard, but FHA loans are kind of a big deal. The advantages of the loan are clear as day: a low down payment required, a less-than-great credit score, closing cost flexibility, and more.
But a common misconception is that the government, particularly the Federal Housing Administration, assists or funds the loan. Nope. They simply insure the loan, which protects lenders from loss or default. Like conventional loans, an FHA loan is still underwritten, approved, and funded by a lender. Easy enough, right?
Now that we got that out of the way, these figures will help paint the picture of what an FHA loan is, and highlight why it’s so desirable for homebuyers, particularly millennials.
FHA loans have been around for 85 years.
For some context, FHA loans were established by Congress in 1934 to help borrowers get a mortgage who would have trouble qualifying for a conventional one. Before the loan was established, most homebuyers would put down 50% of the home’s value, but that became less practical during the Great Depression. FHA loans became a homebuying game-changer.
Speaking of a game-changer, how does a 3.5% down payment sound, millennials?
Fast forward today. 35% of millennials opted for an FHA loan over a conventional one in 2017. Young homebuyers are realizing just how little they need upfront to qualify. With the 3.5% down payment, those in the workforce who are juggling student debt can get keys of their own without having to drain their savings.
The (very) lowdown: By putting 3.5% down on a $200,000 home, your down payment would be $7,000. Not too shabby, eh?
A 580 credit score is not only acceptable, but will give you maximum financing.
By maximum financing, we mean the ability to put down as low as 3.5% of the home’s purchase price.
Over the last year alone, 89,000 homebuyers have taken out an FHA loan.
That’s the most FHA loans funded since 2009. Additionally, in 2015 and 2016, one FHA loan was taken out for every 4.3 conventional loans—in 2017 that number continued to climb. Think folks are realizing just how homebuyer-friendly the FHA requirements are? Um, yeah, that’s safe to say.
A debt-to-income ratio in the 40-50% range is A-OK.
If you don’t know, now you know: Debt-To-Income is so important to qualifying for a mortgage. Where a common DTI ratio for a homebuyer is between 30 and 40%, many lenders allow a DTI ratio between 40 and 50% for an FHA loan with compensating factors like three months cash reserves and a minimum increase in housing payments. Translation: if you carry a relatively high amount of debt compared to your income, there’s still a chance you fit the FHA mold.
You can refi up to 97.75% of the home’s value with an FHA refinance.
To put that in layman’s terms, an FHA refinance allows you to refinance with very little equity built up, as little as 2.25%. The advantage is twofold: you can refinance much earlier in life of the loan, thus potentially lowering your monthly mortgage payment just as quickly.
Well, then. That was a lot of numbers. But by now, the picture should be painted. An FHA loan continues to be as popular as it is lenient for many homebuyers—especially millennials—across the country.
Continue on, to see if an FHA loan is right for you.