FHA Home Loan: A Smart Choice When Rates Are Rising

FHA Home Loan Offers Unique Advantages

As people watch mortgage interest rates move upward, they might be wondering whether there is a mortgage out there for them. The FHA home loan could be something to look into, depending on one’s savings, credit score, income and future needs.

FHA Is More Forgiving

“FHA is best used for first-time buyers, buyers with low capital and those with less than perfect credit, as FHA is much more forgiving on credit,” says Joanne Brenenstuhl, senior loan officer and branch manager at Mortgage One in Fort Myers, Fla.

She sees FHA loans becoming more popular in certain situations now that the rates are going up.

“Conventional loans are sensitive to the buyer’s credit score. If they have a low score, the conventional interest rate will be much higher,” she says. “FHA interest rates are traditionally slightly lower than conventional rates.”

FHA When Rates Are Rising

The FHA loan has been around since 1934 for underserved homebuyers, explains Brian Sullivan, spokesperson for the U.S. Department of Housing and Urban Development (HUD) in Washington, D.C.

“To a very large extent, FHA kept the mortgage market going during the height of the housing crisis,” he says.

Now that the interest rates are on the upswing, here are some other reasons an FHA loan could be the right decision right now and continuing into even higher rates:

Low Down Payment

For those with little savings, FHA loans allow a low 3.5 percent down payment, says Sullivan. “Unless you have 20 percent to plop down on a house or condo, FHA might be one of the few mechanisms to become a first-time homebuyer,” he says.

With higher interest rates, shelling out less for a down payment can allow you keep more money for an emergency fund or purchases you need for the house.

Higher Debt-To-Income Ratio

FHA allows a higher DTI (the borrower’s total monthly debts compared to their monthly income), Brenenstuhl states. While many programs top out at 41 or 43 percent, FHA borrowers may secure approval with DTIs as high as 50 percent.

Seller Contributions

Sellers can pay up to six percent of the loan amount to cover a buyer’s closing costs, according to Sullivan. Instead of negotiating a lower price, it can be much more helpful for cash-strapped buyers to get closing costs covered instead.

Other programs allow just three percent seller contributions for those with smaller down payments. VA allows four percent.

Monthly MI May Be Lower

The FHA monthly mortgage insurance is currently set at .85 percent annually, says Brenenstuhl.

Depending on your credit score, loan type and down payment, conventional (non-government) mortgage insurance can cost as much as 2.81 percent per year.

Easier Approvals

Lenders feel more confident financing less-established buyers with an FHA loan because it is insured by the government, Sullivan says. If borrowers default on the loan, the government covers it.

Borrowers pay for FHA mortgage insurance; taxpayers do not share the burden.

Better Than Renting

FHA loans can be a very affordable way to purchase a house instead of renting, Brenenstuhl says.

Many landlords want the first and last month’s rent for security, and often an additional damage deposit. An FHA buyer will likely need about the same amount to put down on a house, depending on the area.

But the home will be your own and not the landlord’s.

Fully Assumable

A big advantage of the FHA loan is that you can take over a seller’s FHA loan instead of taking out a new mortgage, and you get the loan’s interest rate, which may be lower than today’s market rate, Sullivan says.

“That is a fantastic marketing tool for the seller,” he adds. “Hopefully, the buyer can meet the mortgage requirements because they don’t have to go through a full underwriting process that they would with a new mortgage.”

Taking over someone else’s FHA loan also saves you all kinds of fees, including the upfront mortgage insurance premium that all FHA mortgages require, which is 1.75 percent of the mortgage amount, he explains.

“Today, it is not all that common as the new buyer of the house must qualify for the balance of the remaining homeowner’s loan, and pay the down payment of the difference.” Brenenstuhl says.

Even if you aren’t assuming someone else’s FHA loan but are getting a new FHA loan, you still have that benefit to pass on your low rate on to the future buyer of your home, Sullivan says.

Potential homeowners will be affected by growing interest rates. It’s just inevitable.

America has a history of interest rates going up and down. For instance, Freddie Mac’s graph for 30-year fixed-rate mortgages since 1971 shows the highest being 18.45 percent in October 1981 and lowest at 3.44 in August 2016.

But with good lenders and a lot of research, you will be able to find the right program that fits their budget, lifestyle and needs.

What Are Today’s Mortgage Rates?

Current FHA mortgage rates are similar to today’s conventional mortgage rates — slightly higher than mortgage rates before the election in November. However, you’ll want to look at the loan’s APR and compare it to other options.

APR includes the upfront and monthly mortgage insurance, and you’ll want to compare the cost of FHA and conventional loans, including their fees and insurance, when you shop for financing.