With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

Advantages of FHA mortgages in 2022


Potential homebuyers looking for lower MI costs for FHA loans in 2022 are likely to again be disappointed, even as the capital strength of the FHA's Mutual Mortgage Insurance Fund (MMIF) rose to a level last seen before 2006. FHA is mandated to have a minimum reserve of 2% against losses; for the 2021 fiscal year, the reserve was 8.03%, more than four times the required amount.

Despite the greatly improved solvency of the MMIF, there are no plans to lower upfront or annual MIP costs or allow for the termination of mortgage insurance. The sectors of the MMIF that back FHA forward mortgages and especially HECMs are performing better than they have in years; however, the COVID-19 breakout last year saw a sizable share of FHA-backed mortgages moved into mortgage payment forbearance programs, and these do present some risk of loss for the FHA insurance pool. With still-difficult conditions in some sections of the housing market likely to continue for at least a while yet, HUD will remain prudent about lowering costs, even if this is to the chagrin of homebuyers and homeowners.

Although the cost of an FHA-backed mortgage probably won't fall in 2022, access to funding may continue to improve as lenders slowly to reduce or remove so-called "overlays", where an individual lender will require a higher credit score than the minimums that the FHA requires. Borrowers with less-than-stellar credit should shop around for these more aggressive lenders.

Add lower down payment and credit requirements to the mix, and the fact that these federally-insured loans are assumable and don't use risk-based pricing to set rates, and FHA mortgages are an attractive option to many borrowers.

Carla Blair-Gamblian, a home loan consultant for Veterans United Home Loans in Columbia, Missouri, says that FHA loans will always have a place in the market whether their costs rise or fall.

"Not everyone can qualify for a conventional loan, so comparing [conforming loans] to FHA loans across the board may not yield the best picture of what loan product is best," she says.

Here are the advantages of FHA mortgages in 2022:

Lower credit score and down payment requirements

The FHA requirements for credit score and down payments are far lower than for conventional loans. Borrowers can technically qualify for an FHA loan with credit scores of at least 580 and a down payment of just 3.5 percent, according to HUD. Borrowers with a 10% down payment may be eligible with a FICO score as low as 500.

”While an FHA-backed mortgage with FICO 580 is theoretically available to borrowers, many lenders add 'overlays' on these minimum requirements,” says Keith Gumbinger, vice president of HSH.com. “Loans with the lowest credit scores tend to default at a much higher rate, and lenders are afraid that if they issue too many loans that later fail, HUD will no longer allow them to write FHA-backed mortgages.”

Chris Fox, president of F&B Financial Group in St. Louis, says that borrowers must have credit scores of at least 620 or 640 to qualify for most conventional loans. Fox also says, though, that this is a bit of a misleading benefit. He says that not many lenders will approve any loan, conforming or FHA, for borrowers with credit scores under 620.

FHA mortgage rates

FHA mortgage rates are typically lower than mortgage rates on conforming loans. FHA Borrowers with credit scores of 660 will often qualify for the same interest rate as would conventional borrowers with a score of 740, says Blair-Gamblian.

One important difference between conforming and FHA mortgages is that unlike conventional mortgages, FHA does not use a risk-based pricing arrangement. This means that borrowers who don't have the best credit aren't penalized with a higher interest rate, and that can be a strong reason to consider an FHA-backed loan, even if there can be drawbacks on the mortgage insurance side, discussed below.

Closing costs

FHA loans allow sellers to pay up to 6 percent of the loan amount to cover buyers' closing costs, says Tim Pascarella, assistant vice president with Ross Mortgage Corporation in Royal Oak, Michigan. In conventional loans, sellers can only pay up to 3 percent.

"For a lot of homebuyers, that's a big benefit," says Pascarella.  "A lot of buyers, especially first-time buyers, can save enough money for a down payment, but then they have nothing else. An FHA loan allows sellers to contribute more to closing costs."

FHA loans are assumable

FHA borrowers have yet another advantage over conventional borrowers: FHA loans are assumable. When it comes time to sell, buyers can take over sellers' existing FHA loans instead of taking out new mortgages at whatever the current mortgage rate is at the time. This is especially advantageous in a rising-rate environment.

"In an environment of rising interest rates, [an assumable loan] can give sellers an advantage over their neighbors," says Dan Green, a loan officer in Cincinnati and author of TheMortgageReports.com.

Assuming an FHA loan isn't always simple, though. While buyers will have to meet all the typical mortgage requirements, they may need a much larger down payment depending on the seller's equity.

If the original mortgage balance was $200,000 and the buyer assumes the loan at a balance of $160,000, the buyer must come up with $40,000 in cash to reach the original balance. The buyer might have to take out a second loan to come up with that figure, which may or may not negate the benefit of a lower interest rate.

Despite numerous advantages, there are also downsides to FHA mortgages in 2022.

FHA mortgage insurance premiums

The biggest downside of FHA loans has long been the costs associated with the upfront and annual mortgage insurance premiums.

The upfront mortgage insurance premium is 1.75 percent of the loan amount. That's $3,500 on a $200,000 mortgage loan. Although you can pay it out-of-pocket, this cost is usually added to the principal balance of your loan. So your loan amount is actually $203,500.

Then, there are annual mortgage insurance premiums to consider. Unlike Private Mortgage Insurance (PMI), which has a range of costs depending on the borrower's credit score and down payment, FHA Mortgage Insurance Premiums (MIP) go by down payment only. Borrowers with less than a 5% down payment are charged 0.85% of the outstanding loan amount each year, while borrowers with more than a 5% down payment are charged 0.80% per year for loans with terms greater than 20 years. For a borrower with a $200,000 loan and just a minimum 3.5% down payment, this means an MIP of over $143 per month. For a borrower with great credit, that's about $40 per month more than a similar conventional loan.

Annual MIP rates are lower for borrowers who are taking out 15-year FHA-backed mortgage loans. Borrowers putting less than a 10% down payment are charged 0.70% of the loan amount each year, and those with more than a 10% down payment are charged 0.45% of the loan amount each year.

In both cases, FHA MIP are much higher for borrowers who look to take out "jumbo" FHA-backed mortgages in high-cost markets.

If you're looking to make only a minimum downpayment when purchasing or refinancing, it's important to know how the intersection of costs due to mortgage insurance and interest-rate differentials will affect you. Use HSH's FHA Calculator and low downpayment mortgage comparator to see costs over your anticipated time frame.

FHA mortgage insurance for the life of the loan

With conventional mortgage loans, borrowers don’t have to pay for private mortgage insurance if they come up with a 20 percent down payment. Conventional borrowers can even request that private mortgage insurance be dropped once their mortgage balance falls to 80 percent of the value of their home.

With FHA loans, borrowers who closed their loans after June 3, 2013 must make mortgage insurance payments every year for the life of the loan, no matter how much equity they accrue.

"The only negative of an FHA loan is its cost," says Pascarella. But if a solid credit score and down payment are a stretch for you, an FHA loan might be your only option.

This article was updated by Keith Gumbinger,

(Image: Karen Roach/iStock)

More from HSH.com:

GeltFinancia July 16, 2019 2:19 am

Thankful for sharing this useful post!

Nancy York October 20, 2018 1:29 am

Yo got my attention when you said that you can qualify for an FHA loan with a down payment for as low as 3.5 percent. I'm sure that my mother is going to be glad to know what you said because she's planning to buy a house. Her savings are not enough to cover 20% down payment for a house, so I'll share your blog with her.

Ellen Hughes September 21, 2018 5:19 am

It sure was nice to know that FHA loans require lower down payments compared to conventional loans which means that you can pay for a down payment of just 3.5%. This is something that I will make sure to share with my father because he's interested in buying a house. He said that he couldn't afford a too high downpayment for a house since he has other bills that he needs to pay monthly, so I'll share your blog with him.

Raisa Delima September 30, 2017 4:02 pm

Thanks for going over the lower credit requirements of FHA loans. I need to get one of these loans, and my credit score is probably not what it needs to be. I'll work on that so I can get a loan sooner for my needs. Thanks!

Dennis January 21, 2017 12:51 am

This article's first point is now moot... Sorry.

Editorial Team January 25, 2017 10:13 pm

We think there's a good chance that the suspension of the MI premium reduction will be lifted at some point and lower costs will again kick in. We've re-updated the article to reflect the reversal. - HSH

Sandy September 9, 2016 10:31 pm

Can I get an fha loan if I buy a home from a family member?

Editorial Team September 13, 2016 7:45 pm

Sandy, Thanks for commenting. If you plan on taking out a mortgage loan and not through one of your family member, than yes, you can apply for an FHA loan. Thanks, Tim Manni, HSH.com

Hebe August 25, 2016 6:03 am

If I have a FHA loan and I paid 20% down payment, do I have to pay PMI?

Brenda Walker March 1, 2019 7:32 am

Why would you take out an FHA loan if you have 20% to put down.. typically the down payment is the issue. I'm confused ...perhaps I'm missing something but why wouldn't you go to a credit union (which typically doesn't have the fees regular lenders have - well my credit union doesnt)if you have the down payment of 20%

Wade Joel May 18, 2016 10:09 pm

I like how there are still options for people who don't have the greatest credit score who want to buy a house. I think it is really interesting that you could get the same interest rate as someone with a better credit score. I think it also really neat that if you decide to sell that house you can just transfer the loan to the new buyer.

Brenda Walker March 1, 2019 7:36 am

You won't get the same interest rate as someone with a better score.. the upside to an FHA loan to someone who does have a really good score is that THEIR interest rate will be very comparable to that of a conventional loan, but if your score is low you won't get the same interest rate - down payment is usually the thing that prevents people from getting a conventional loan

Heather May 17, 2016 4:26 am

Sorry I came late to the article. I have a credit score of 693 and looking at at least 20% down, maybe more for a mortgage no more than $85000 as I know my budget limits. I could get approved for. Should I go for a FHA loan or try for a conventional first. I don't want to have to pay out PMI insurance which is why I will put down at least 20% because I don't want a mortgage over $450 a month.

Michelle Moore May 16, 2016 11:30 am

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Ms March 23, 2016 2:03 pm

This article http://www.fhahandbook.com/blog/do-fha-loans-require-pmi/ and this http://themortgagereports.com/14691/fha-mip-mortgage-insurance-premiums-mortgage-rates basically says "Annual MIP Required for the Life of the Loan, in Some Cases." Shouldn't that be mentioned in your article?

Editorial Team March 28, 2016 4:20 pm

Ms, That fact is mentioned in our article. In fact, there is an entire section titled "FHA mortgage insurance for the life of the loan". -Tim Manni, HSH.com

Logan Murphy December 18, 2015 1:40 pm

It's really nice to hear that, "The FHA requirements for credit score and down payments are far lower than for conventional loans." My wife and I have only been married just of a year and a half. We are really wanting to find an get into our first home. It sounds like an FHA loan is worth looking into. We are relatively young to be married and are still trying to build a credit score. Thank you for sharing this information, it was really helpful.

Editorial Team January 5, 2016 4:48 pm

Logan, We're so glad you found this info useful. Please reach out if you need more info. Thanks, Tim Manni, HSH.com

Ann Gray October 21, 2015 9:35 am

Hello, I have a credit score of 610, 620 and 664 according to FICO.com I own a home free and clear, no mortgage, in Lutz Fl 33548... which has approx value of $215-$230 k. I am looking to borrow $50k to pay off car loan of $14k as well as some credit cards $5k ..and cash in the bank for emergencies and home improvements. I do NOT want to run credit unless you feel there is a program that might help me. I am trying to improve my credit score and every month it is going up a little. By consolidating my debt%u2026.It will put me in a better financial situation as well as help me repair my credit. Regards, Ann Gray

Editorial Team October 26, 2015 7:47 pm

Ann, Thanks for writing in. You're right, you should continue to improve your credit score. You need to contact a mortgage lender (we are not mortgage lenders) to see what assistance is available to you. If you can get your score up you should research a home equity loan or a home equity line of credit. Thanks, Tim Manni, HSH.com

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