Besides saving yourself money, using an FHA endorsed loan to purchase a home may be the most patriotic thing you can do. Hear me out. In the late 1990s, the government correctly sought to increase homeownership. Naively, the government did not look to the FHA to take charge in this call to action. Instead, they relied on Fannie Mae and Freddie Mac to broaden the types of loans they purchased from mortgage lenders, relaxing underwriting guidelines and pushing the moral envelope. Fannie Mae and Freddie Mac had a fiduciary responsibility to look after the well being of their shareholders, not the consumer. As such, the loans created over the next few years put an emphasis on profit — excessive prepayment penalties, interest only and “teaser” rates. The appeal to consumers: These new loans came with little or no money down.
In FY 2009, FHA insured 30% of total purchases and 20% of total refinances in the housing market (it does not lend its own money). Here are just some of the benefits of using the FHA.
- Low down payment of 3.5 percent. The down payment can even be a gift from a relative, non-profit organization or employer.
- Interest rates are competitive with conventional mortgages
- Guidelines allow buyers to qualify for more home than conventional loans
- There is no income cap for FHA
- Fixed interest rate with no prepayment penalty
Uncle Sam NEEDS YOU!
When you use the FHA to purchase a home, you pay an upfront mortgage insurance premium (MIP). This upfront premium is commonly rolled back into the mortgage to avoid an out-of-pocket expense. In addition, you pay a monthly MIP. The monthly MIP is less expensive than private mortgage insurance (PMI) for a conventional loan with 5 percent down (if you can still find a lender originating 95% LTV conventional loans). These MIP fees generate $1 billions in revenue for the government every year.
The FHA loan can also be used to finance home improvements for purchases and refinances under its 203K program.
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DHW asks: Have you used the FHA to purchase or refinance a home? How was your experience?