FHA mortgages are excellent tools which can be used to help many first time home buyers with no credit or past credit problems enter into the housing market. The "subprime" mortgage crisis going on now has resulted in a buyer's market and prices on homes for sale are lower while seller concessions are higher than they have been in years. Yet, most of the 100% financing conventional and subprime loan programs which were available to potential homeowners are long gone now. FHA is the only mortgage program available for quite a few prospective buyers to use to buy a home. Hundreds of thousands of homeowners who bought homes financed with subprime mortgages over the past few years now face huge interest rate adjustments of up to 5 percent or more. Spend 5 minutes watching a business news channel these days and it is easy to understand why these people believe they have no other mortgage options left.
Here are 5 myths about FHA loans that prevent many from trying.
1. FHA loans take longer to get approved.
The truth is that in today's world of automated underwriting and paperless processing, FHA loans take no longer than conventional loans to close if you are being helped by a loan officer with FHA training.
2. FHA loans require a lot of extra paperwork.
The documentation required for an FHA loan is nearly the same as the paperwork required for a conventional loan. FHA only asks for a few more documents than a conventional loan, and the extra documents that FHA does require take very little extra time and exist to protect you during the process.
3. FHA loans have more costs than conventional loans.
FHA loan interest rates are set based upon the same market factors conventional loan interest rates are based on. As a matter of fact, even when the FHA mortgage insurance premiums added to your payment are factored in, FHA loans are often less expensive than conventional mortgages for first time borrowers and borrowers with past or even present credit problems.
4. FHA required mortgage insurance is too expensive.
Every conventional mortgage above 80% of the value of the property being financed requires mortgage insurance which will pay off a portion of the loan if the borrower defaults. Prior to the invention of mortgage insurance programs, all lenders required 20 percent down payments to obtain a mortgage. FHA's mortgage insurance program does require a small upfront mortgage insurance payment which is automatically added to your loan, and a small yearly mortgage insurance premium which is divided up and added to your monthly payments. This is actually very inexpensive compared to new conventional mortgage insurance rates which can require almost 3% per year in mortgage insurance to be added to the the typical borrower with lower credit scores! As of July 14, 2008 this mortgage insurance costs less if your credit is better.
5. FHA loans have very restrictive guidelines.
As a matter of fact, the exact opposite is true in many respects. Although FHA loans have lower maximum loan amounts than conventional mortgages, they don't have the income restrictions placed on Fannie Mae and Freddie Mac community lending products. Getting an FHA loan with limited or no credit history, or credit problems is much easier than obtaining a conventional mortgage. FHA allows for manual underwriting. This means that if the automated underwriting system does not approve your loan, an underwriter can actually look at your file and determine if common sense dictates that you would be able to afford the mortgage. The underwriter can approve your loan even if the automated system turned it down. Manual underwriting is common for FHA loans and very rare for conventional loans. In addition, if interest rates later go down, FHA loans allow for a streamlined, no requalifying refinance process.
