I haven’t mentioned FHA home loans for San Francisco real estate in a while but after receiving two emails last week from prospective first time home buyers curious about using a FHA loan to buy their first home, I thought it might be a good time for a refresher.
What’s a FHA Home Loan?
FHA is the Federal Housing Authority, under jurisdiction of HUD – Housing & Urban Development. What they do is provide insurance for lenders to give borrowers home loans at reduced down payment and credit score levels.
From HUD’s website:
The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.
They don’t actually lend the money. You go to a regular bank or lender that is approved by the FHA. For example, BofA, Wells Fargo, Guarantee Mortgage, & First Capital Group are local San Francisco home loan options for FHA.
Why Get a FHA Home Loan?
The most common reason a buyer would choose a FHA loan over a conventional mortgage is the lower down payment requirement. You can buy a home with as low as 3.5% down payment vs. the typical 20% down for a conventional loan. Of course, there are great 10% & 15% down payment options from conventional lenders now available. They briefly went away during the financial crisis but are back.
In San Francisco, the real estate market has really picked up. Multiple offers are again commonplace and prices are on the rise. You may feel that the real estate will appreciate faster than your savings account and you want to buy your starter home before you are priced out of the market.
As a new client said to me yesterday, “I’m already paying sky-high San Francisco rents and feel comfortable with the payments. The mortgage payment even with the insurance isn’t going to be much different. And then, I get tax savings, home equity appreciation, and the pride of being a homeowner in this expensive city.”
The other reason you might choose a FHA home loan is because your credit is less than stellar. You still need to qualify – have a job, have some reserves, be able to afford the payments – but you can get away with more blemishes on your record and a lower FICO score.
Another bonus is that FHA allows non-occupant co-borrowers, meaning that you can buy with the help of someone (say Mom or Dad) who is not going to live in the property but in order to qualify, you need to include their income, credit, or money.
What’s the Downside?
First, you will pay FHA mortgage insurance which becomes an added closing cost and monthly payment. FHA is insuring your lender for your lack of a full 20% down payment so, of course, they expect you to pay for it! Keep in mind, that you will have mortgage insurance for any loan with less than 20% down, for example, with one of those cool 10% down loan I mentioned earlier.
Second, there is a maximum loan amount dictated by FHA. In San Francisco, you can borrow up to $729,500 for a single family home and $934,200 for a duplex. Here is a complete list of FHA loan limits for California by County. Your purchase price is the loan amount plus your down payment. As you can imagine, this eliminates a lot of our housing stock. Yet, there are many places you can buy and we have helped dozens of FHA home buyers in recent years.
Third, the property you buy must be FHA-approved. This is easy if you plan to buy a single family home and a bit more challenging for a condo. All single family homes should qualify unless they are really intense fixer-uppers. (Though FHA does have a fix-up loan product.) With condos, it’s a bit trickier. It’s the building’s HOA – Home Owner Association – that must qualify, meaning it’s the building rather than the individual unit. Many newer construction buildings through San Francisco neighborhoods like Mission Dolores, South Beach, South of Market, and more are FHA-approved as are some smaller buildings.
Which Condos are FHA-Approved?
For a quick and dirty peek at currently FHA approved San Francisco condos, check out HUD’s website. But keep in mind, that this list is not all-inclusive. If you align yourself with a FHA savvy lender and Realtor, we can help walk you through the process and your best options.
Happy house hunting!