All About St. Louis FHA Loans

St. Louis FHA LoansAn FHA mortgage is a mortgage that is backed by the Federal Housing Administration. FHA loans in St. Louis are popular with people buying a home for the first time, especially if they are younger or have a limited credit history. Since the program began in 1934, the U.S. Department of Housing and Urban Development has insured more than 38 million mortgages for single families.

According to Ellie Mae’s Borrower Insights Survey in 2017, most baby boomers will have a conventional mortgage while most millennials have one backed by the FHA or another government program. This article will give an overview of why many first-time home buyers in St. Louis find FHA loans to be an appealing option.

FHA Mortgage – what is it?

An FHA mortgage is a home loan approved by private lenders, offered to those buying a home for the first time. These loans are insured by the federal government, allowing lenders to lend to someone they may usually not want to. If the borrower defaults, the government will absorb the cost, protecting the lender.

Pros

The main advantage of FHA loans is that they allow lenders to make loans to home buyers whom they normally would not have approved, due to federally backed insurance. The borrower will be able to get an FHA mortgage with lower down payments and lower credit scores than they would need for a conventional mortgage. This makes homeownership more accessible. FHA loans also usually offer lower interest rates than their conventional counterparts.

Cons

With an FHA mortgage, you will have to pay a mortgage insurance premium up front and for a long time afterward, possibly for the length of the loan. The premium is what funds the insurance. FHA loans also have more restrictions – usually, you will need to be occupying the house.

When is an FHA loan a good option?

If you are only beginning to establish a financial track record, or if you have had some financial trouble in the past, it makes sense to get an FHA loan. It is also a good option if you have trouble saving for a large down payment.

Qualifying for an FHA loan

In order to qualify for an FHA loan, you must have proof of employment and proof of income. You also will need to have enough of a credit history to establish a credit score. It will be necessary for your credit score to be at least 580. It is also necessary for you to have a clean record on the government’s CAIVRS database.

Conventional Loans

Conventional loans are offered by private lenders and are not government backed, so they usually have stricter requirements for qualifying. However, they greatly reduce the expense of mortgage insurance. According to Ellie Mae, 72% of homeowners have a conventional mortgage.

Pros

The chief advantage of a conventional loan is that the cost of mortgage insurance is much lower. Conventional loans are also more flexible, as you do not have to constantly occupy the property.

Cons

Conventional loans usually ask their borrowers to make higher down payments and have higher credit scores and a lower debt-to-income ratio. They also charge higher interest rates.

When is a conventional loan a good option?

If you have a strong credit history and more financial resources, a conventional loan may be a good option. If you can afford to pay a larger down payment, you may be able to avoid paying mortgage insurance.

Qualifying for a conventional loan

To qualify for a conventional loan, you will need a clean credit history with no recent foreclosures or bankruptcies and a credit score of at least 700. You will also need to prove that your debt payments will be less than 45% of your substantiated income.

FHA vs. Conventional Loans

When deciding between an FHA or a conventional loan, which option is best largely depends on your circumstances.

If you do not meet the definition of a first-time homebuyer or are buying a home you do not plan to occupy yourself, you will not qualify for an FHA loan. But if you do qualify as a first-time buyer and are planning on buying a primary residence, it really boils down to the trade-off between more expensive mortgage insurance and higher credit history requirements.

Usually, FHA loans will have more lenient credit requirements, and you will not have to wait as long to be approved after a bankruptcy or foreclosure. However, they are more lenient because they charge higher mortgage insurance premiums.

If you have a conventional mortgage, once the LTV ratio drops below 80% you will no longer need mortgage insurance. This means that if you make a down payment of at least 20%, you can avoid paying for insurance altogether. With FHA loans, you can expect to continue to pay mortgage insurance for 11 years, or until you pay off the loan. Finally, interest rates are slightly higher on conventional loans than FHA loans, but this is more than offset by the lower rates and duration of mortgage insurance premiums.