The Popular FHA Home Loan
A lot of buyers in their twenties and thirties are looking to buy a home right now. But they’re worried about higher interest rates and saving enough for the down payment. That’s why many turn to borrower-friendly options like FHA home loans. This type of loan requires only 3.5% down to those who qualify.
In fact, new data show that millennials are taking out larger FHA home loans than in past to buy a home. This especially helps them compete against other buyers in markets with limited housing stock, much like Seattle area.
Explore different loan options. Learn what you qualify for. An FHA home loan may be ideal for you.
What The Research Found
- 26% of all closed loans to millennials last November were for FHA loans.
- Across the nation, borrowers are taking out much larger FHA loans vs previous years. For instance: in San Francisco, the average FHA home loan amount was $505,871 in November 2018 vs. $460,853 a year earlier; in Boston, it was $353,680 vs. $343,219. In Washington, D.C. it was $313,168 vs. $283,584.
- For 56% of FHA loans, men were listed as the primary borrower. Women accounted for 35%. 9% were not specified.
Millennials continue to make up the largest segment of buyers. But inventory remains relatively tight. And interest rates have risen in recent months. Hence, borrowers are not waiting to buy really, you have to act quickly. Instead, they’re increasing their loan amount to purchase what is available on the market.
Millennials have found the need to take out larger FHA-backed mortgage loans. This is so that they can buy from the limited inventory available in such a competitive market.
Many millennials have high student debt which can limit their ability to save money. That makes FHA home loans an attractive choice. An FHA home loan can be away of carrying a lot of debt or after a negative credit event in the last 12 to 24 months.
These numbers suggest something else, too: Gen Y is increasingly motivated to buy homes.
The reasons include family formation and the opportunity to build equity. There’s a surging demand among their generation. This is particularly true in large metro areas such as San Francisco, Los Angeles, and Washington, D.C.
Benefits Of An FHA Home Loan
FHA home loans are enticing to millennials and others for many reasons. One is that they are not risky: An FHA loan is backed and issued by the U.S. government (the Federal Housing Administration).
More importantly, they allow more flexibility when it comes to your debt-to-income ratio (DTI) and credit score.
Want to qualify for a 3.5% down FHA loan? All you need is a FICO credit score above 580 and a DTI ratio of less than 43 percent. You must have a steady income and proof of employment. And the home you want to buy must be used as your primary residence. You must also pay for mortgage insurance for the life of the loan if your down payment is less than 10 percent.
Note that some lenders offer conventional mortgages with just a 3 percent down payments required. And Fannie Mae has a Conventional 97 loan that also requires only 3% down. The mortgage insurance you may have to pay for the latter is also cancelable when your home reaches 20% equity.
Before pursuing an FHA home loan
Prior to committing to an FHA home loan, prepare yourself for homeownership.
Pay off outstanding debt, including student debt. Start with the loans that have the highest interest rates first. Also, aim to use no more than 35% of your allowable credit limits.
Improve your credit score. This could lower your interest rate so that a monthly mortgage payment is much more affordable. In addition, monitor your credit report on a consistent basis.
Create a realistic budget. Outline all your expenses so you know exactly how much of a mortgage payment you can realistically afford every month.
Research the housing market in your desired area. Look into the most affordable neighborhoods. Get a better understanding about the fluidity of the housing market, too.
Look for alternative ways to save money. For example, research housing options in the suburbs vs. the city. Look at more affordable options in states with higher inventory. And pinpoint day-to-day expenses that can be sacrificed.
Try to save at least 3.5% of the purchase price of a home within your desired area.
Get educated about the mortgage loan process. Learn what materials are needed to apply for a loan as well as what it takes to get a loan approved.
Shop around for FHA-approved lenders. Explore multiple options to find the provider that will work best for your needs.
Prepare to apply for an FHA loan. Gather any documentation that a lender will need. And begin writing any letters of explanation about your financial situation that a lender or underwriter may require. A full and transparent loan application will sharply increase your chances of being approved.
*This article does not represent legal interpretation or advice. This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Seattle Mortgage Brokers, LLC NMLS: LO# 305371 MB# 761615