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How an FHA loan can help millennials become homeowners in 2017

Current market conditions, from rising interest rates to tightening housing inventories, in addition to existing financial obligations may make millennials feel like they can't become homeowners. But millennials shouldn't simply give up on their ambitions to eventually buy a home.

To become a homeowner, millennials should consider a loan backed by the Federal Housing Authority.

Why take out an FHA loan?

Millennials should consider taking out a mortgage backed by the Federal Housing Authority because the lending requirements are less strict than conventional mortgages.

Current trends indicate FHA loans are growing in popularity among millennials. National Mortgage News stated 41 percent of millennial women homebuyers borrowed through an FHA mortgage, as did 38 percent of millennial men.

One reason millennials are gravitating toward FHA loans? They don't need to save as much money for a down payment. Bankrate​ stated some buyers are able to buy a home with a 3.5 percent down payment with an FHA mortgage. However, a lower down payment comes with a trade off as buyers have to pay an upfront mortgage insurance premium.

The second reason millennials are borrowing FHA mortgages: a lower credit score requirement. A study from TransUnion revealed nearly 43 percent of millennials have a subprime credit score (below 600). Even with a less-than-ideal credit score, a millennial may still be able to buy a home with an FHA mortgage. Millennials with above average credit scores, typically in the 750 range, can also take advantage of FHA mortgage benefits.

Millennials struggling to get approved for a conventional mortgage should consider an FHA loan. With greater flexibility and less stringent requirements, FHA loans are an appealing mortgage option for young prospective homebuyers.

HUD Lowers FHA Premiums, Combatting Higher Rates

Housing and Urban Development (HUD) Secretary Julian Castro announced on Monday that the Federal Housing Administration (FHA) will reduce annual insurance premiums by 25 basis points. The move affects most new mortgages with a closing or disbursement date on or after 1/27. The HUD expects these new rates to save FHA insured homeowners an average of $500 this year.

The reductions can be made because the FHA Mutual Mortgage Insurance Fund has gained $44 billion in value since 2012.

"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," said Castro.

"This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers."

This is not be the first time that the FHA has altered mortgage premiums. At the beginning of 2015, the agency lowered insurance premiums from 1.35 percent to .85 percent, which resulted in nearly 330,000 new loans, according to The Mortgage Reports. More than 1.25 million people applied for FHA loans in 2016, according to the HUD’s annual report for 2016.

FHA loans are different from traditional loans because the federal government will cover any losses a lender incurs from an FHA-backed loan. This improves the likelihood that lenders will approve applicants for mortgages who might not otherwise be able to get a loan. The tradeoff is that mortgage insurance premiums add an extra amount to a borrower's monthly mortgage payment - approximately $70 for every $100,000 borrowed, according to The Mortgage Reports.

FHA loans are helpful to applicants with lower credit scores because any applicant with a credit score of 580 or higher is eligible. Traditional loans often have a much higher credit score threshold, which bars some people from getting approval for a mortgage.

When an FHA loan can be stronger than a conventional loan

Following the housing crisis and the clampdown on subprime lending, many prospective buyers found themselves wondering how they might ever afford a home. Even with a rapidly rebounding economy, those with weak credit scores and limited funds to put toward a down payment may have felt underserved or hopeless.

For many, relief came in the form of an FHA loan. These government-insured mortgage programs offer relaxed standards and faster turnaround times for buyers. But the question remains: Even if you can qualify for a conventional loan, when does it make sense to opt for an FHA mortgage? Here are a few situational incentives that might make an FHA loan right for you:

"When does it make sense to opt for an FHA loan?"

If you have a lower credit score
One of the biggest advantages of an FHA loan is that the credit requirements are more flexible. Conventional loans have a traditional credit score requirement cutoff of around 620, while an FHA loan has a cutoff of around 580.

FHA keeping mortgage insurance life-of-the-loan premium for foreseeable future

In spite of recent calls to eliminate the controversial mortgage insurance life-of-the-loan policy on loans backed by The Federal Housing Administration, head of the FHA Ed Golding testified before a House Financial Services subcommittee stating that the FHA would be standing behind the policy. 

"I am actually not considering changes to the life-of-loan policy," Golding said. This is the first major statement by the FHA on the life-of-loan premiums since a 2013 statement by the FHA announced it would require most borrowers to continue paying annual premiums for the life of their mortgage loan.

"The FHA has gone back and forth on the topic of mortgage insurance premiums."

Starting in 2001, the FHA has gone back and forth on the topic of mortgage insurance premiums. Initially, the FHA canceled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal balance — while remaining responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan. After the Obama Administration directed the FHA to reduce annual mortgage insurance premiums by 50 basis points, from 1.35 percent to 0.85 percent, the FHA seem anxious to make up for the lost MIP revenue.

The Boomerang Buyer: How Many are Coming Back?

It takes 7 seven years for a foreclosure to disappear from a credit score. Now do the math from when the Great Recession began, and 2016 could very well signal the era of the boomerang buyer.

A boomerang buyer is one of the 7 million people who lost their homes to foreclosure during the recession. There are varying degrees of optimism as to what they will do now. On the high end of optimism, Realty Trac, using foreclosure, affordability, and demographic data, believes almost 3.5 million Americans will become eligible to buy a home over the next 3 years. The highest potential will be seen in the areas hardest hit by the recession, specifically the Phoenix, Miami, Detroit, and Las Vegas areas.

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TransUnion, whose numbers have been cited by the Wall Street Journal, has much more modest predictions. Their report, which defines a boomerang buyer as anyone who had a foreclosure, short sale, loan modification, or 60 day deiliquency during the recession, predicts that under 1 million of boomerang buyers will be able to meet underwriting guidelines over the next 3 years.

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Recent changes to FHA eligibility you should know about

Over the last year, the Federal Housing administration has announced several notable changes to their FHA loan program. The government sponsored program is designed to expand the availability of home financing for those who might not otherwise qualify and make it easier to afford a home.

These changes will impact not only eligibility but the way that FHA loans are implemented. Here is a guide to the major changes made to FHA loans you should know about.  

FHA will no longer exclude student loan payments deferred over 1 year

This was a huge benefit for Americans struggling with student loan debt, but new guidelines means that, if you have deferred payments on student loans for over a year, the payments you have made will factor into calculations related to your FHA loan payments and debt ratio differently.

FHA easing rules on financing for condos

Bowing to pressure from buyers looking to take advantage of low down payments and flexible credit qualification requirements, the Federal Housing Administration has eased rules that previously made it difficult to purchase a condo unit with an FHA loan. The restrictive rules had resulted in only 20 percent of previously eligible condo communities open to FHA loans on units. FHA condo loan endorsements dropped to 22,800 in 2014, less than half of the 57,800 endorsements the previous year.

"The fact that the mortgagee letter is effective immediately tells me that FHA understands that there is a problem," said Brian Chappelle, a mortgage consultant and co-founder of Potomac Partners.

Condos can be notoriously hard to finance due to the "unit-by-unit" nature of selling, but also are, "often the most affordable option for homebuyers, especially first-time buyers," according to NAR President Chris Polychron. With the new rules in place, condo units that are second homes will be considered owner-occupied units and count toward the current 50% owner occupancy requirement, even if they are not the owner's principal residence. The FHA has also simplified the condo certification procedures, easing restrictions on condo association insurance.

Underwater homeowners: Take advantage of an FHA Streamline

For underwater homeowners—people who owe more on their mortgage than the current value of their home—finding a way to stable financial ground can be tough. Monthly payments add up and it may feel like there's no way out from under home debt. Luckily, for those who already have Federal Housing Administration-insured loans, there is possible relief: an FHA Streamline refinance.

FHA Streamline is a mortgage program that allows homeowners with existing FHA-backed loans to simply and quickly take advantage of today's low rates. Qualifications include:

  1. Borrower must have an existing FHA-insured loan
  2. Minimum three month perfect payment history
  3. The refinance must result in a lowering of the borrower's monthly principal and interest payments— or under certain circumstances change the loan from adjustable rate mortgage (ARM) to a fixed-rate
  4. No cash-out refinancing allowed
  5. 210-day "waiting period" between refinances

3 facts about FHA loans

For buyers wondering what is an FHA loan, the answer is simple: an FHA loan is a mortgage insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development, aimed at allowing more buyers access to home financing through lower down payment requirements and less stringent lending standards. The FHA pays part of the buyer's mortgage insurance, allowing lenders to offer some of the lowest interest rates available to those with less-than-perfect credit or limited funds to contribute to a down payment.

Here are a few essential facts about FHA loans:

Bank's retreat from FHA loans leaves room for smaller lenders

On October 16, the Department of Housing and Urban Development (HUD) on Friday withdrew part of a proposal that would have required mortgage servicers to file FHA insurance claims within a specific time frame or face termination of FHA insurance. Lenders had expressed concern that the proposal would slow the origination of FHA loans and weaken the reliability of FHA's insurance guarantee.

Yet even with this extension being granted by HUD, many eligible borrowers may not be aware of what is an FHA loan or how it might benefit them. FHA loans are designed to make housing more affordable for low-income consumers offering consumers low interest rates along with increased flexibility in credit score and a small down payment of 3.5%, along with nominal mortgage insurance premiums. But for banks like JPMorgan Chase—currently the largest bank in the U.S.—FHA-insured loans already represent a sticking point: Many of the larger banks have already limited or stopped offering entirely FHA-backed loans in the past two years over concerns about credit and legal risks for lenders.