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With the US economy continuing to be strong, interest rates low and housing prices rising, the mortgage and housing market continue to be major drivers of the markets in the US.
Mortgage lenders who want to grow their business are increasingly turning to FHA loans to be the backbone of their business going forward. Below are 6 reasons that the FHA lending market will continue to be strong for mortgage lenders in the next two years.
Many first-time buyers have great difficulty saving a large down payment for that first home. That is why the FHA program is such a God send for many of them. With only a 3.5% down payment required for many FHA borrowers, it is possible for large numbers of renters to become home owners.
For the mortgage lender, the FHA program having such a low-down payment makes it a great focus of your business. Even better, FHA allows the borrower to get their entire down payment in the form of a gift, so the lender is more likely to get business with FHA loans as so little upfront money is required.
There was a time when credit requirements were higher for FHA and other loans after the mortgage crash. In recent years, FHA guidelines have been relaxed so more borrowers can qualify for a loan. Mortgage lenders that pay for FHA mortgage leads have the flexibility of accepting borrowers with a credit score as low as 500, with 580 being the minimum requirement for a 3.5% down payment.
But mortgage lenders have the flexibility to only accept borrowers with higher credit scores if they wish. Generally, most mortgage lenders will work with borrowers with a 620 or higher credit score, but it is up to you and your business model to determine which type of FHA borrower you want to lend to. This is one of the top reasons that loan officers and lenders love FHA-leads.
FHA has established rules for debt to income ratios or DTIs. Generally, the front-end ratio should be 31% or less of the borrower's gross monthly income. This includes mortgage payment, HOA fees, property taxes, mortgage insurance and home owner's insurance. But mortgage lenders can approve borrowers with a front-end ratio of up to 40%. Note that as the lender, you will be required by FHA to show why you believe this is an acceptable risk. But the flexibility is there to take a borrower with a higher front-end debt to income ratio.
Also, FHA has set its back-end ratio standard at 43%, which is quite generous. This ratio compares the gross monthly income to all monthly debt payments, including mortgage, credit cards, car payments, student loans, etc. But you may be allowed to approve a borrower with a back-end ratio as high as 50%. You also will need to show why doing this loan is an acceptable risk. With FHA's underwriting flexibility you are more like to get qualified-leads when targeting the FHA niche.
After the last financial downturn, millions of Americans were hit hard with job loss, upside down mortgages and other major financial challenges. Many of them declared Chapter 7 or Chapter 13 bankruptcy.
Many consumers continue to believe that you cannot get a mortgage for at least seven years after a bankruptcy, but this is definitely not the case with FHA financing. Lenders can work with borrowers with a bankruptcy on their record if it has been at least two years since the bankruptcy was finalized. The borrower does need to show that they have reestablished themselves financially and are not regularly missing debt payments.
As the lender, you also may be able to loan to a borrower who is only one year out of bankruptcy, but FHA will want proof that there were factors beyond the borrower's control that lead to the Chapter 7 or Chapter 13.
Mortgage insurance is always required for FHA loans, but there have been some changes made by the agency in the last few years. For most borrowers, it is now a requirement to have mortgage insurance for the entire life of the loan. The only exception is for borrowers who put down 10% or more; the insurance can be cancelled in that case after 11 years.
This is a key point for the mortgage lender because it gives you assurance that even if the borrower defaults, you still will recoup most of the money that you loaned. For that reason, many FHA borrowers continue to be a good risk even if they have average to poor credit.
If you want to base your mortgage lending business on a young and growing demographic, FHA loans are a great choice. Ellie Mae's Millennial Tracker has found that 41% of underwritten loans to women in 2016 were backed by FHA. (housingwire.com). Also, 38% of millennial men used FHA loans to buy a home. So many millennials using FHA loans means the program is a great choice to grow your mortgage lending business.
It is estimated that almost 20% of loans issued in the US are FHA loans, so you really cannot go wrong with making FHA loans a centerpiece of your mortgage lending business model in 2019 and 2020.
Please note that LeadPlanet.com does not offer home refinance programs. LeadPlanet.com is not a bank, credit union, broker or mortgage lender. We do not hold ourselves out as being able to assist a person in obtaining a residential mortgage loan in MN or any other state. LeadPlanet.com is a website that provides information about home financing and services that connect consumers to approved lending professionals. We do not offer refinance mortgages directly or indirectly through representatives or agents.
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