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FHA Makes Home Ownership Possible for Many

Borrowers qualify for more with lower down payments

Jan. 11, 2016

By ROBERT DIGITALE The Press Democrat - Tribune News Service

Janine Johnson became part of a surge of Sonoma County, California, homebuyers who last year used FHA loans to purchase real estate.

"Rents were astronomically ridiculous," said Johnson, who works as an accountant in Healdsburg.

So in December 2014, she began looking at houses and in early 2015 bought a two-bedroom home on a quarter acre in Guerneville.

"My mortgage is much cheaper than any rent I would have paid for the same house," she said.

The FHA loan allowed her to make a smaller down payment, compared to the amount of money required by a conventional loan, and the home is working well for Johnson and her two dogs.

Last year, the number of single-family homebuyers in the county using FHA loans jumped 47 percent, according to multiple-listing data analyzed by Mike Kelly, a real estate agent with Keller Williams in Santa Rosa.

Last year, the number of single-family homebuyers in the county using FHA loans jumped 47 percent, according to multiple-listing data analyzed by Mike Kelly, a real estate agent with Keller Williams in Santa Rosa.

Their rise in popularity, due in part to a drop in the cost of mortgage insurance, meant that FHA loans were used to purchase one in every 10 homes sold in the county last year, or 530 properties. Such loans are insured by the Federal Housing Administration.

Most county home sales continue to be financed through conventional loans, which are mortgages eligible for purchase by the government-sponsored enterprises Fannie Mae and Freddie Mac.

Conventional loans were used in nearly six in 10 sales last year, according to Kelly, who has hosted a weekly radio show on Santa Rosa station KSRO for nearly two decades.

About a quarter of last year's sales involved buyers who paid cash. The remainder of the transactions included a smattering of "VA" or veteran loans, adjustable rate loans, private financing from either sellers or from "hard money" lenders and sales where an investor is using IRS "exchange" rules to buy a house after having previously sold another investment property.

The FHA loans offer homebuyers such features as lower down payments and the ability to take on more debt than with a conventional loan. But because they allow borrowers to make a down payment of less than 20 percent, they also require borrowers to take out mortgage insurance, which increases their monthly payment.

While Johnson chose an FHA loan for the lower down payment, Manny and Jill Castrellon of Santa Rosa selected FHA because it allowed them to borrow more than they could with a conventional loan.

The couple sold a home and moved last year from Carson City, Nevada, when Manny Castrellon transferred to become manager of the Les Schwab Tire Center in Rohnert Park. Jill Castrellon works as an office manager for G&C Auto Body in the same city.

Home prices here are nearly double what they are in Carson City, Manny Castrellon said. The equity from the sale of their earlier home meant they could meet the down payment requirements for a conventional loan. But they selected FHA financing because it allowed them to borrow more.

"We were able to buy a house big enough and keep it in the terms we needed with the family that we have," said Manny Castrellon.

Last summer, the Castrellons and two children from their blended family moved into a four-bedroom, three-bath home on Ironstone Circle in southwest Santa Rosa.

"It was definitely worth it," Jill Castrellon said. "We love the area, love the house."

Most FHA mortgages last year went to first-time buyers, loan officers said. Plenty of them were looking to exit a rental market in which apartment rents have soared 40 percent in four years.

"Almost every FHA buyer here has bought because of rising rents," said Scott Sheldon, a loan officer with W.J. Bradley Mortgage in Santa Rosa. Sheldon acted as the loan officer for both Johnson and the Castrellons.

Marty McCormick, owner of McCormick and Co. Homes and Loans in Santa Rosa, said renters are watching both rents and home prices rise.

"Young folks," said McCormick, "are feeling the pinch."

As a result, he said, some renters are deciding to enter the housing market now rather than to wait and try to save to acquire a bigger down payment.

FHA requires a down payment of only 3.5 percent of the home's value, compared to 10 to 20 percent for many conventional loans. On a home purchase of $528,000, which was the county's median sales price in November, the FHA borrower would need to put down $18,480. In contrast, a 10-percent down would amount to $52,800.

For many first-time buyers, said Kelly, "FHA is definitely the way to go."

Otto Kobler, branch manager in Santa Rosa for Summit Funding, said the jump in FHA lending was largely due to a lowering of the premiums for mortgage insurance in January 2015. Because FHA loans allow small down payments, FHA borrowers must also purchase mortgage insurance. With the drop in mortgage insurance premiums, FHA loans are now priced competitively with conventional loans -- and are sometimes less costly.

In announcing the change, the Department of Housing and Urban Development estimated that the lower premiums would save a typical FHA homeowner $900 a year and would "spur 250,000 new homebuyers to purchase their first home over the next three years."

Sheldon and Kobler said buyers may find it easier to qualify for an FHA loan than a conventional one if they wish to tap retirement funds for the down payment. Also, FHA loans may reduce interest and mortgage insurance costs for those with good but not excellent credit -- for example, a person with a credit score of about 705, Kobler said. The top credit score available is 850.

However, as long as interest rates remain low, most FHA buyers aren't expected to keep the loan for 30 years. Instead, they will likely refinance into a conventional loan that does not require mortgage insurance once they have built up enough equity.

"Everybody on the planet hates mortgage insurance," said Kobler.

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Copyright (c) 2016, The Press Democrat, Santa Rosa, Calif.

Distributed by Tribune News Service.

This story was distributed by TNS - Tribune News Service
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