The FHA mortgage was designed to help home shoppers with lower credit scores and a small amount of cash in the bank – and these loans have long been one of the most popular mortgage types available.

Per mortgage software firm Ellie Mae, approximately twenty percent of all mortgage applicants will opt for an FHA loan because of its buyer-friendly guidelines.

Thanks to recent policy changes within FHA, lenders could start approving more loans. Buyers could have a much easier time purchasing a home, and applicants who were previously turned down could receive an FHA mortgage approval in 2017.

Source: The Mortgage Reports

Lenders and the FHA In 2017

FHA’s new policy will benefit home buyers this year, albeit a bit indirectly.

Per Tim Lucas at The Mortgage Reports, lenders should become more lenient as they experience less scrutiny from FHA. In turn, mortgage banks and brokers could relax lending standards and approve more FHA buyers in 2017.

This should further increase access to FHA loans for the typical home buyer, in line with FHA’s core mission.

FHA, from its inception in 1934, has maintained flexible lending standards – as their goal is to promote homeownership among a population that would not qualify for other types of financing.

Guidelines are so lenient, in fact, that lenders usually set their own FHA lending standards that are much more strict.

For example, states Lucas, the FHA may allow the borrower to qualify with income received for less than two years. A lender can “overlay” a requirement that the borrower needs to be employed a full two years before approving the loan. By-the-book FHA guidelines would result in an approval.

He states that “lender created overlays to reduce risk that their loans will be subject to FHA penalties. Overlays won’t go away. But they could be diminished enough for a subset of borrowers to be approved even if they received a denial in the past.”

FHA Making It Easier To Qualify

The Federal Housing Administration (FHA) is a government agency that insures the loans, which in turn allows lenders to issue approvals with low downpayments and less-than-perfect credit scores.

But FHA will only insure a loan if it meets its standards.

Lenders approve loans imperfectly, sometimes missing the mark when it comes to FHA guidelines. Minor errors and mistakes make their way through the loan process.

States Lucas, “this is an unintended consequence for FHA. The organization’s mandate is to increase homeownership levels in the U.S. But loan refusals were the real-world effect, as lenders feared high penalties for mistakes.

To combat this, the FHA announced that it would not penalize lenders when loans went through with minor mistakes that had no bearing on loan approval.”

This takes a lot of pressure off of lenders. FHA’s goal is that lenders will be more willing to approve home buyers for FHA loans.

FHA Benefits and Their Appeal

FHA loans will continue to be a favorite among first-time home buyers. While the program is well-used by new buyers, applicants also use it to make a subsequent home purchase due to a move or after outgrowing their first home.

One advantage with an FHA loan is its lenient credit score requirements. Lenders genrally require a minimum score between 580 and 640 – and this is one of the lowest required scores among mortgage options.

Another draw to the FHA loan is its low required downpayment. As little as 3.5% down is required at closing.

FHA loans also tend to offer some of the lowest mortgage rates available. According to Ellie Mae, average mortgage rates on FHA loans are between 10 and 15 basis points (0.10% – 0.15%) lower than average rates on conventional loans.

FHA loans provide a unique set of benefits that are a perfect “fit” for a sizable portion of today’s home buyers. Contact me for more regarding FHA home loans!

The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.