FHA Loans are Great For Move-Up Homebuyers

Homebuyers are finding out that FHA is a great program for helping moving up buyers  purchase a new home. homeowners are quickly learning the advantages that FHA loans  have over Conventional financing options, mainly the lowest down payment option available.

The drop in property values has created an excellent opportunity for current homeowners to sell their home and purchase a bigger and/or nicer home.  The issue has been the lack of equity in the home being sold. In an “up” market, a home seller can count on using equity to fund a healthy down payment for their next purchase. But in a down market, a large down payment becomes the biggest challenge. This is where the FHA loan comes to the rescue.  FHA home loans  only require the borrower to come up with a 3.5% down payment. There is no need to scrounge together a 20% down payment. Here is an example of what we mean.

Let’s say a family, we’ll call  them the Jones, bought their home for $200,000 in 2002.  They put 20% down when they first bought the home. At its peak in 2005 the home increased in value to $300,000.  In 2005 they considered buying a $300,000 home. They estimated that if they sold their home for $300,000 then after commissions and loan payoffs they would have $75,000 down payment, leaving them with a $225,000 loan amount. Their estimated total mortgage payment, including taxes and insurance, was going to be over $2,500 per month.  That payment was more than they were comfortable with so they elected to pass on the home of their dreams. The typical $300,000 home was going to give them additional space for their growing family, but they never did anything. Now it’s 2010 and they’ve seen their home drop in value by 30% from the peak. Current value is now only $310,000, or only $10,000 more than what they bought it for. Their loan balance has been paid down to $270,000. If they sell now, after commissions and loan payoff, they will be lucky to walk away with $10,000. Sounds like a bad situation. But not when you really look at the numbers.

The $300,000 homes they were dreaming of a few years ago have also dropped 40% and are now worth closer to $280,000. Also, with an FHA loan they would only need 3.5% down, or $9800 for down payment. Plus they can get the seller to pay most of the closing costs, so netting $16800 will actually be enough to get them into their Dream Home. But what about the payment? The Jones have heard that FHA has monthly mortgage insurance. Plus, what kind of an interest rate are they going to get with such a small down payment? To their delight they find out FHA interest rates are comparable to Conventional financing, even if they had 20% down payment. And the Monthly Mortgage Insurance is that a problem either. Their total payment will be approximately $2500 per month.

If the Jones had bought the $300,000 home a few years ago with a $60,000 down payment they would now be $60,000 upside down and have a mortgage payment approximately $1600 more than if they buy the same home now. To make things even better, there is a flurry of activity from First Time Buyers looking to buy homes in the $275,000 to $300,000 price range, making it easy to sell their home. The $300,000 price range is moving, but not as quickly, allowing them to cherry pick the home of their Dreams.

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