FHA Loans Especially Suited To Millennials

Millennial homebuyers apparently are big fans of FHA-insured mortgages.

A new analysis of loans closed in January found that 35 percent of borrowers born between 1980 and 1999 opted for Federal Housing Administration mortgages, well above FHA's overall market share of 21 percent, according to mortgage technology company Ellie Mae.

Why the strong attraction? It's all about the total package of features.

Take, for example, two new homebuyers who chose FHA financing. Like many young couples, they carry a lot of student debt — both have master's degrees — and both now have well-paying jobs at tech-related companies in the Los Angeles area.

They don't have assets or the cash for a 10 percent down payment, but they wanted to buy quickly so that their monthly housing payments would contribute to their own nest egg, not a landlord's.

They consulted with a mortgage lender, who walked them through the pros and cons of the options. FHA turned out be the best answer on many fronts.

On down payment, FHA's minimum of 3.5 percent is low, but it's not best in class. Fannie Mae and Freddie Mac have programs requiring just 3 percent down, but they come with a variety of eligibility requirements, such as income cut-offs. Veterans Affairs and the US. Department of Agriculture loans allow for zero-down but are limited to veterans or specific geographic areas.

Credit scores are where the differences get really important for millennials, many of whom have middling scores. FHA accepts much-lower scores than Fannie and Freddie — even below 600.  As a rule, when low-down-payment borrowers have FICO scores below 720, "FHA is going to give (them) the lowest payment."

On debt-to-income ratios (recurring monthly debt compared with monthly gross income), Fannie and Freddie typically won't go higher than 45 percent, while FHA can stretch up to 56 percent, provided there are "compensating" positive factors, such as extra-strong income.

One glaring drawback to FHA: Unlike the private mortgage insurance that comes with low-down-payment Fannie and Freddie loans, FHA premiums are non-cancelable for the life of the loan. But most first-time buyers don't keep their starter houses for long, so it's not likely to be a deal-killer.

For more information on getting the right loan for your needs, contact a local Wallick & Volk mortgage professional. We would love to help you finance your dream home!