In Denver, Boulder and throughout most major U.S. cities, a growing number of millennials are buying a home with an FHA (Federal Housing Administration) insured mortgage. The findings are based on the latest report from Ellie Mae, a mortgage industry software firm that tracks U.S. mortgage applications.
FHA Home loans represented 35% of all closed loans in January 2017. Specifically, FHA loans continue to be the top choice of millennial homebuyers even with the cancellation of reduced FHA fees in January.
Reasons why do millennials prefer FHA loans
Low down payment: Qualified home buyers in Colorado who apply for an FHA loan can make a down payment as low as 3.5% of the purchase contract or appraised value, whichever is less. Conventional loans by Fannie Mae and Freddie Mac also have low down payment programs. However, the eligibility restrictions include income limits in Boulder county, or military service eligibility for VA loans, and the geographic restrictions with USDA loans.
Debt to Income Ratios: The second advantage of FHA loans is the debt-to-income ratio, or DTI, which is frequently an area that disqualifies young, debt-strapped borrowers. Your DTI is your monthly gross income divided by your recurring monthly debt on your credit report and housing. For example, if you earn $7,500 per month and your credit cards, student loan, and auto loan monthly totals are $2,000 and your rent is $1,500, then your current DTI is 47 ($3,500 / $7,500 = 47). Student loan debt is still calculated even if in deferment.
Conventional loans require a 45 percent or less DTI, but FHA may permit above 50 or even as much as 56 percent, if the borrower has strong compensating factors like six or more months of the mortgage payment in their bank account, a high credit score, or recently started earning a much higher income.
Flexible credit standards: FHA loans are a bit more credit lenient in contrast to Conventional mortgages. Ellie Mae’s report proves this fact which shows the average FICO score for a conventional loan was 748, while the average for an FHA loan was 690 and 734 for a VA loan.
Many traditional banks require a 620 middle score while some mortgage companies allow borrowers who have a 580 middle credit score to obtain an approval for a 3.5% down payment.
Assumable: Young adults are more likely to change jobs and move for an opportunity than older adults. As a result, these younger buyers will put more emphasis on the future resale value. If you decide to sell your home and you have an FHA loan, which is assumable, this means the new buyer can take over the homeowner’s mortgage payments. The new homebuyer will need to qualify but in a rising interest rate environment, this can be a very attractive selling point.
Ownership: Young college-educated homebuyers with well-paying jobs tend to have lots of student debt, a car loan and with rents rising without an end in sight, the faster they get into a home, the quicker they start to build equity and stop throwing away money. With a home, you have a potential tax write-off with mortgage interest deduction and potential appreciation. In addition, you can rent out a room for additional income without landlord restrictions.
The one negative about FHA loans is their permanent mortgage insurance requirement but that can be dealt with easily by selling the home or refinancing into a conventional loan later if it will benefit you.
FHA loans are just one of many mortgage options available to Colorado home buyers.
By William Cook, Omni Fund, Inc.
William Cook is a Senior Loan Officer at Omni Fund, Inc. He is well versed in Conventional, FHA, jumbo mortgages and loans for self-employed borrowers. For more information, visit coloradoloanpro.com or e-mail [email protected]. NMLS# 1048392