FHA mortgages are more popular than ever for new home purchases and refinances. Easier qualifying and lower down payment and equity requirements make this home loan an attractive choice in today's tough credit climate.

Three Reasons to Refinance or Buy with an FHA Home Loan

FHA mortgages offer many advantages that conventional loans don't. Here are three reasons to first consider an FHA mortgage when buying a new home or refinancing a current mortgage.

1. FHA Mortgage Underwriting Is Flexible

While conventional mortgages like Fannie Mae programs are getting harder to qualify for, FHA is less rigid. Instead of just taking the recommendation of a computer program or applying hard-and-fast credit score thresholds, FHA's underwriters look at the applicant and stretch guidelines when warranted. Here are some breaks you may catch with FHA underwriting:

• Higher debt-to-income ratios. Many lenders set a maximum debt-to-income ratio of about 38%. FHA allows up to 41% and will stretch it to 43% for an energy-efficient home.
• Bankruptcy does not necessarily disqualify you. In some cases you can get a mortgage twelve months after your discharge.
• Mortgage problems don't have to derail your refinance. FHASecure allows you to refinance from an adjustable rate mortgage (ARM) to a fixed rate if an increase in your adjustable rate caused your credit problems.

2. FHA Lets You Borrow More

Many lenders want you to put at least 10% down (15% in declining housing markets) if your credit isn't absolutely top-drawer or your income isn't high. FHA offers the following advantages:

• The required down payment is only about 3%
• Up to 95% loan-to-value (LTV) is allowed for cash-out refinances
• Combined first and second mortgages can exceed 100% of the home's value.
• FHA allows others (like sellers) to contribute up to 6% of the purchase price for closing costs and prepaid items like property taxes and insurance.
• You can even use "sweat equity" for your down payment. FHA states that "Labor performed or materials furnished by the customer prior to closing, on the property being purchased, may be considered as a cash investment."

3. FHA Lenders Don't Pile On the Fees

Take a look at Fannie Mae's Loan Level Pricing Adjustment Matrix and check out the surcharges. A homeowner with a 660 credit score looking for an 85% cash-out refinance would incur the following fees (in addition to the regular loan charges):

• .25%  adverse market delivery charge
• 1.25% credit score charge
• 1.50% cash out refi charge

Those three points added to the regular fees on a $250,000 mortgage cost the homeowner an extra $7,500! You won't have those add-ons with an FHA loan.

FHA home loans can be a smart way to purchase a new home, cash in some home equity, or refinance out of an adjustable rate mortgage or subprime loan. Especially for those refinancing without much equity, FHA loans are easier to get and cost less. And that looks better than ever.  

Sources

efanniemae.com

FHA.gov

HUD FHA refinance Program Comparison Matrix

HUD.gov FHA Advantages