Rethink Buying: The Power of the FHA Loan for Millennials - Chris Smith Realty

Rethink Buying: The Power of the FHA Loan for Millennials

Posted on Jul 19, 2017

Rethink Buying: The Power of the FHA Loan for Millennials

My nephew Joe and his wife Kaitlin, newlyweds, are both professionals with advanced degrees and all the college debt to match.

After having each rented homes with classmates throughout graduate school, once wedding bells rang, Joe and Kaitlin decided to buy a home as an investment rather than paying rent – which they viewed as paying someone else’s mortgage.

Yes, there are pros and cons and risks with everything in life. With the knowledge of the benefits a Federal Housing Administration (FHA) Loan could present, they went for it.

Joe and Kaitlin are part of the 38 percent of millennials who during the first half of 2017 chose an FHA loan to finance the purchase of their first home, thus exceeding FHA’s 22 percent market share for single family home purchases. This FHA data is available at EllieMae, an on-demand residential mortgage technology company.

What is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, an agency within the U.S.  Department of Housing and Urban Development.

With an FHA Loan, borrowers pay for mortgage insurance, which protects the lender from a loss if there is a loan default. With required insurance/protection, lenders can offer FHA loans at attractive interest rates and with qualification requirements that are more attainable than conventional mortgages.

What are some of the benefits of opting for an FHA loan?
The top benefits of purchasing a home through an FHA loan, particularly if you are a first-time millennial home-buyer are:

  • Ability to present a lower down payment, as little as 3.5 percent, with a 580+ credit score.
  • FHA accepts much lower scores than Fannie and Freddie Mac.
  • Mortgage interest and property tax payments are tax deductible.
  • Each monthly mortgage payment builds equity in a real estate asset rather than paying rent which reaps no return.

What are some of the qualification requirements for an FHA loan?
Credit Score
: You can obtain an FHA mortgage with as low as 3.5 percent down if your credit score is 580 or higher. If your credit score is between 500 and 579 a 10 percent down payment is required.

Insurance: Two mortgage insurance premiums are required on all FHA loans: There is an upfront premium of 1.75 percent of the loan amount. This premium is paid when the borrower obtains the loan and it can be financed as part of the total loan amount.

The second insurance is called the annual premium which is paid in monthly installments.   The rate varies based on the length of the loan, the loan amount, and the initial loan-to-value ratio.

House Condition: According to HUD, properties financed with FHA loans must meet minimum safety, security and soundness standards.

Rent vs Buy
According to a recent report, New Jersey has been among the top five most expensive places to rent in the country for years with rents far exceeding the national average.

Context! Let’s rent a two-bedroom apartment in New Jersey and compare rent expenses to that of purchasing a home with an FHA and the conventional loan.

The average rent for a two-bedroom apartment in New Jersey is $1,757.

$2,635 = Security deposit equal to 1.5 times rent
$1,757 = First months rent up front
$4,392 =Total initial payment to rent a two bedroom apartment

With $4,392 up front, your total first-year expense of $23,719 – after which you own nothing and reap no benefit.


Financing a $250,000 home purchase with an FHA loan

$ 8,750 = 3.5% down payment with credit score 580+
$ 4,375 = required upfront 1.75% insurance
$ 5,000 = estimated closing costs*
$18,125 = Total up front funds to purchase a home with an FHA loan

Okay, so with the ability to rent an apartment at $4,392 up front expense, you are roughly $14,000 away from home ownership and tax benefits on mortgage interest and property tax payments. This can be possible perhaps using savings, gifts from family or careful planning to save this amount over one to two years.

*The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as an appraisal, credit report or title expenses. Sometimes closing costs can be rolled into the mortgage  (whether conventional or FHA), or given back to the buyer as a seller’s concession or credit at closing thereby saving the buyer the immediate out of pocket expense at the closing table!

Purchasing a $250,000 home with a conventional mortgage
$50,000 = Traditional 20 percent down payment
  $5,000 = Minimum closing costs 
$55,000 = Total estimated up front funds to purchase a home with a conventional loan

Ouch! $55,000 is hard to fathom with college debt or for anyone just starting out. Possible, yes, but this may not be an optimal first course of action for young people seeking home ownership.

If you are a millennial, particularly living in New Jersey where rental costs exceed the national average, home ownership through FHA financing may be just the right step for you.

How do I get an FHA loan?

FHA is an insurer, not a Lender. You can apply for a loan through an FHA-approved lender.   Not all FHA approved lenders offer the same interest rates and costs so it is wise to shop around. HUD provides a complete list of FHA approved lenders for your consideration.

 If you wish to become a homeowner, you will have choice and control with most everything including the kitchen sink! You can choose the right home to create priceless memories where you raise a family and become part of a community.

I am happy to help you navigate the purchase of your first home in New Jersey.  Feel free to contact me anytime. (732) 320-2431 or tdefazio@chrissmithrealty.com.

About the Author: Thomas DeFazio is a full-time Realtor® at Chris Smith Realty in Spring Lake, New Jersey serving Monmouth and Ocean Counties.

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The content herein is offered for general information only. The information presented at this site should not be construed to be formal advice or the formation of a client relationship.

 

THOMAS DEFAZIO