What is "FHA" and why is it so important

What is "FHA" and why is it so important

With the announcement this past week that one of my favorite neighborhoods "Cross Creek" getting FHA certification there has been a lot of discussion of what this means.  A lot of these comments have been grossly inaccurate. Getting FHA certification can be a really good thing.  FHA certification means that a property in a specific community is eligible for a FHA mortgage. Most seasoned buyers opt for a conventional mortgage because in most cases it best suits their needs.  However for a first-time home buyer a FHA mortgage is a big deal and this is why.

A recent article in the New York Times: Home Ownership and Wealth Creation  discussed how homeowners had 35x more wealth than those that rent. To understand how that is possible see my previous blog post 660K.BillForrest.com.

The basis to all of this is home ownership. Young professionals are starting to realize that to build real wealth AND lower their monthly housing costs ownership is the way to go, but there are real obstacles to acquiring that first home.

Young professionals today, the kind that every community wants, are carrying a huge burden.  These are the doctors, lawyers, and other highly educated young people that are early in their careers and most all of them have huge college loan debt as the below graphic shows. U.S. student loan debt now exceeds $1.2 trillion and is increasing at the rate of 14% per year.

So what does this have to do with a FHA Mortgage?

Everything.  Student loan debt is the biggest obstacle facing first-time home buyers. There are many requirements for a buyer to qualify for a home loan:  Down payment, Income, Credit Score, and Debt Ratio are the primary factors.  Of these DTI or Debt-to-Income Ratio is the biggest challenge.

Conventional mortgages in general have a cap of 43% DTI.  Meaning that a borrower's total monthly debt cannot exceed 43% of their monthly income.  A FHA home loan allows for most borrower's up to and as much as 56-57% DTI. As a young professional carrying a huge student loan debt this is the difference between becoming a home owner or not. 

FHA does have some other great benefits such as requiring only a 3.5% down payment vs. 5% on conventional, greater flexibility on gift funds from Mom and Dad, lower credit score requirements, and in most cases a lower interest rates. 

WOW this loan sounds great why doesn't everyone use it?   It has a huge downside.  FHA home loans require Mortgage Insurance for the entire life of the loan and it is calculated at a much higher rate than a conventional mortgage.  That is why even though it has a lower interest rate the monthly payment is much higher than a conventional mortgage for the same purchase price.

Why this is important to communities like Cross Creek?

It increases home values due to demand. Cross Creek is a great community with a unbelievable value at its current price points.  However until last week a huge portion of the buying public were unable to purchase a home in the community.  Intown Atlanta is filled with young professionals that can only purchase a condo with a FHA loan. Most buyers in this 100-200K price range are young professionals. This is a huge key segment of the buying public for Cross Creek. The seasoned 2nd and 3rd time home buyers are looking at higher price points due to higher income, equity resources, and larger households needing larger living spaces.

Getting this FHA certification is a huge win for Cross Creek. Now suddenly there are as many as five times the number of active buyers considering purchasing in Cross Creek because of this FHA loan availability.  For current sellers this is an awesome thing.  Higher demand brings higher sales prices through competition for a limited number of listings.

For our older residents having FHA certification it now means they can take out a reverse mortgage and that is another conversation for another time.....

For those of you that are grammar hawks I know that there are huge grammatical flaws in my writing style.  I am an excellent REALTOR with a strong proven record.... I do not hold myself out to be a great writer....lol...  All the Best, Bill