Orange County Home Buyers should be aware that FHA is not just for First Time Buyers. I've been hearing this statement from a number of clients over the past few weeks. "FHA is only for First Time Buyers, right?" The answer is "no".  FHA is for anyone who is looking to buy a home. There are reasons why someone would or would not choose to do an FHA loan, but being a First Time Buyer is not one of them.

Here are reasons why an Orange County, CA Home Buyer would choose an FHA loan

• FHA only requires 3% Down payment. Unless a home buyer is eligible for a VA loan, which allows 100% financing, or is eligible for some other specialized loan program, like CalSTRS or CalPERS, then FHA will be the only way to buy a home with only 3% down. FHA is about to raise the down payment to 3.5%, but that is still much better than the 10% down payment currently required by Conventional loans with Fannie Mae and Freddie Mac guidelines. (This is specific to California, where we are "hit" with a declining market adjustment to our down payment minimums.)
• FHA is more flexible with credit scoring and how it effects the final interest rate. On a Conventional Fannie Mae or Freddie Mac type loan, if the loan to value is 90% (meaning a 10% down payment) and the FICO score below 720, then there are "add's" to the rate, pushing the interest rate higher. If, for example, the FICO score is as low as 620, the interest could be a full .5% higher than if the same borrower had a FICO of 720. An FHA borrower could have a 620 score, put only 3% down, and still have the same rate as someone with 10% down and a 720 FICO score. FHA does not have an "add" to the rate until the FICO score is below 620.
• FHA is more flexible with down payment. The down payment can be a gift. (From family or very close relative) On a Conventional loan, the home buyer needs to come in with at least a 5% down payment before a gift can be used for the remaining 5% of the minimum down payment. There is an exception though. If the buyer is getting a 20% down payment gift, then they don't need any of their own funds.
• 401K loan can be used for down payment without counting towards debt to income ratios. This is a very important consideration. A 401K loan is acceptable for down payment with either Conventional loans or FHA, except that the payment that is associated with the 401K loan will be included the borrowers debt to income ratios on a Conventional loan, which will decrease the loan amount they will qualify for. On a FHA loan the payment is not counted, allowing them to qualify for a bigger loan amount.
• FHA Streamline Refinance program. After buying the home, if interest rates drop, the homeowner would be able to take advantage this program, which is a no qualifying, no appraisal, no credit, and typically no closing cost program. As long as the homeowners loan will go to a lower rate and payment, they qualify. On a Conventional loan, in order to refinance a homeowner would typically need to have the property appraised again, and income and assets are verified again, just like when they first bought them home.
• There is more flexibility in having the seller payment closing costs. Specifically, prepaid expenses, also called recurring closing costs.These are items such as interest, taxes and insurance. They can add up to several thousand dollars on a typical deal. FHA allows the seller to pay these on behalf of the buyer. Conventional loans do not. So on a Conventional loan, plan on needing 10% down, plus several thousand dollars for recurring closing costs, even if you have the seller payment all of the nonrecurring closing costs.

A  "move up" buyer typically used to have a big enough down payment that they would not get an FHA loan. However, with the drop in property values there is a better chance now that even a move up buyer won't have a big down payment, thus making FHA a program to consider.

If you are wondering whether FHA is the program for you, contact me an I'll prepare an analysis.  Contact Tim Storm at 877-786-4243 x 7. I am a Certified Mortgage Planning Specialist and Senior Loan Officer with in  Frost Mortgage Lending Group in Orange County, CA.