The Federal Housing Administration continues its mission to help consumers realize the dream of homeownership. In today’s mortgage lending environment, there are three main types of loan options available for borrowers — conventional, FHA and jumbo loans. Of the three, FHA mortgages are significantly more flexible, especially in the following areas:
- Higher debt ratio allowance.
- 3.5 percent equity.
- Lower credit scores may qualify.
- Spotty credit histories may be acceptable.
The fact that the FHA raised its loan limits in 188 counties nationally speaks to a broader theme that there is reinvigorated demand for housing, both in terms of home sales and refinancing. For example, in California’s Sonoma County, the Federal Housing Finance Agency had a maximum conforming loan limit for 2015 at $520,950. That number has been raised to $554,300 for 2016. The FHA followed suit, raising its loan limit previously set at $520,950 to match the $554,300 figure.
What this means in Sonoma County and elsewhere is that you can buy a home with 3.5 percent down up to the maximum local FHA loan limit. In other words, for people who have been on the fence about buying a home because they didn’t have the cash or because they were at a competitive disadvantage because of rising housing prices, there are now more options.
Using Sonoma County’s previous loan limit of $520,950, for example, a borrower in 2016 will have the ability to borrow up to $33,000 more or spend $33,000 more on a home than they could have with 2015’s FHA underwriting criteria.
Case in point: If you were looking for a home and your loan size was more than $520,950 in 2015, you would have been thrown into the jumbo loan category, requiring significantly more cash out of pocket. This is why the loan limit increases can be a substantial benefit for the right type of borrower, because they would need less cash and have more leniency in loan-to-values needed for a higher priced home.
As a refresher, FHA still offers these flexible financial thresholds:
- Up to 85 percent cash-out refinancing.
- Three-year waiting time after a foreclosure.
- Three-year waiting time after a short sale.
- Three-year waiting time after a deed in lieu of foreclosure.
- Two-year waiting time from Chapter 7 bankruptcy.
- One-year waiting time from Chapter 13 bankruptcy.
While FHA loans can make sense for people who want to get a foot in the door, they do come with some higher costs consumers should consider. FHA loans contain a 1.75 percent upfront mortgage insurance premium, typically financed in the loan amount (or paid for in cash), as well as a monthly mortgage insurance premium.
An FHA loan can help a borrower accomplish financial goals while at the same time bettering their equity position and their credit score to refinance into something lower in the long term. (You can see where your credit currently stands by viewing your free credit report summary, updated each month, on Credit.com.) Like conforming conventional and jumbo loans, FHA loans still require full documentation, such as tax returns for two years, W-2s, pay stubs and bank statements. But they are flexible on using reserves and gift monies to purchase or refinance a home. And be sure to look for tips on negotiating the best price when buying a home.