FHA Loan Limits Up Too; Why & When To Use FHA?
HUD recently released FHA Loan Limits for 2018, and in high cost counties they largely (but not always) match the new loan limits for conforming loans.
In high cost counties (most of the CA coast), the FHA Loan Limit ranges from $679,650 for a one unit property, all the way up to $1,307,175 for a four unit property. California’s loan limits can be found here.
Amazingly, owner occupied buyers can pay $1.3 million for a fourplex with only 3.5% down.
For borrowers with liquidity or credit issues, FHA financing is by far the best option.
FHA Advantages and Disadvantages, and Things to Know:
1. Less Money Down: FHA only requires 3.5% down.
2. Much more flexible credit standards: FHA allows for credit scores as low as 580; “alternative credit” (cell phone, electric bills, etc.) if there are too few accounts on a credit report; and short seasoning from major events, e.g., 2 years for a BK; 3 years for foreclosure, etc.
3. Lower rates: FHA rates are about 1/4% lower than conforming rates.
4. Assumable: This is a non-factor when rates remain low. But when rates start to increase, this feature that is unique to FHA is extremely valuable.
5. 100% of the down payment can be a gift.
6. Up-Front MIP: FHA buyers have to pay a 1.75% upfront mortgage insurance premium in most cases. This is of course offset somewhat by FHA’s lower rates, and is almost always financed into the loan amount (buyers do not need to pay Up Front MIP “out of pocket”).
7. FHA loan limits do not always match conforming loan limits: Buyers and lenders need to check loan limits as they travel from county to county.
8. Monthly MI: With 3.5% down, FHA buyers have to pay a 0.85% MI (divided by 12) for the life of the loan. This MI, however, is an especially good deal for borrowers with lower credit scores; Private Mortgage Insurance (PMI) rates are much higher for borrowers with low credit scores.
9. No prepayment penalty! This is important b/c a large percentage of our FHA buyers refinance into conventional financing within a few years of purchase, after they accumulate sufficient equity.
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