Why College Graduates Should Use FHA Loans to Buy a House.

May is graduation month across America and Best FHA Lender would like to offer congratulations to all of the recent college graduates.  What an exciting time in your life.  You may have been offered a nice starting position and the door to your future is wide open.  You have the opportunity to make smart financial decisions that will lay the foundation of your financial future and benefit you for the rest of your lives.  As enthusiastic as that sounds, it may not translate easily if you’re living in mom and dad’s basement.  But, even if you’re not “that guy” or “that girl”, you should consider the fact that right now is an incredible time to buy your first home , and a FHA loan is a fantastic tool for recent college graduates who are first time home buyers .

Why choose an FHA loan?  How does a college graduate looking to buy a house benefit from an FHA loan?

Here are the Top 10 Reasons that college graduates should use a FHA loan to buy their first home .

10.  Housing prices are extremely low.

Admittedly, this is not a function of FHA; however, it does create a sense of urgency for a recent college graduate to take advantage of the fact that they graduated while home prices in the real estate market are so low.  FHA loans have the features that provide the opportunity to buy your first home right out of college.

9. FHA interest rates are extremely low.

You may think that this is not a function of FHA either and that it is dictated by the market, but that is not entirely true.  You probably have learned in college that a higher risk correlates to a higher return.  If that is the case, why do FHA rates have such low interest rates when they are so often used by first time home buyers and people with bad credit or no credit?  The answer is that the federal government insures the loan, thus providing a lower level of risk to the investor.

8. Take advantage of the $8000.00 first time home buyer tax credit.

On February 17th, 2009, President Obama signed the American Recovery and Reinvestment Act that included, as one of its key provisions, a modification of the first time homebuyer tax credit.  Currently, first time home buyers can obtain up to $8000.00 in the form of a tax credit.  The good news is that repayment of the tax credit is no longer required.  The availability of this tax credit currently expires on December 1st, 2009.  Click here to see more details about the $8000 first time home buyer tax credit.

7. Buying a house will increase recent college graduates opportunities to itemize your deductions on their tax returns.

When you file your tax returns, you have the option to choose between taking either a standard deduction or itemizing your deductions.  As you might expect, there is a threshold that you must cross in order to be able to itemize your deductions.  Many recent college graduates do not have enough deductions to meet the level needed to be able to itemize.  In 2008, the standard deduction for an individual filing under the “single” status was $5450.  If you own your home, the interest paid on your primary residence is tax deductible and the interest that you pay over a year’s time may be greater than the standard deduction depending on your loan size and interest rate.  Once you have met the threshold for itemization, you may potentially be able to itemize the following expenses (please check with your CPA or tax advisor):

• Interest expense on your primary residence (as mentioned)
• Private mortgage insurance paid on your primary residence
• Unreimbursed Medical or Dental Expenses
• Taxes paid.  This includes taxes on personal property and state income tax.  Keep in mind that a sizeable portion of your annual car registration is a personal property tax.
• Charitable donations – both as cash or assets – made to qualifying charitable organizations.
• Casualty and theft losses.
• Unreimbursed job-related expenses.
• Other miscellaneous deductions

6.  FHA loans allow recent college graduates to count their time in school as part of their employment history.

To qualify for a mortgage, you have to prove income stability.  Typically, a lender will require that you prove at least two years of previous employment history in the same field.  How do you do that if you just graduated and you’re starting your first job in your career path?  FHA allows a recent college graduate’s previous school experience to be used in order to satisfy the two year employment history requirement.

5. FHA loans allow recent college graduates to qualify with limited credit history.

FHA loans allow you, a potential first time home buyer, to be approved for a mortgage even if you have no FICO scores or if you have a credit score with limited credit history reporting.  This is through the use of “non-traditional” credit references.  FHA allows you to provide a clean 12-month payment history for three credit references that do not report to the credit bureaus such as rental payments, utilities, cable TV, telephone bills, etc.  FHA underwriters will review these alternative credit references in order to evaluate your bill paying habits and make a determination of whether or not you will be approved.

4.  FHA loans allow recent college graduates to be approved using a non-occupying co-signer.

Many college graduates start their careers in entry-level positions with entry-level pay.  However, they know that their earning potential is good and that their income is likely to increase.  If you are a recent college graduate, you can buy the house that you want now, by taking advantage of the fact that FHA loans allow for the use of a non-occupying co-signer.  The co-signer must be a blood relative, or an unrelated individual that can document evidence of a family-type, long-standing relationship not arising out of the loan transaction.  If this is the case, the co-signers income, assets, liabilities and credit history are included on your loan application in order to determine your credit worthiness.

3. FHA loans allow the seller to pay recent college graduates’ closing costs.

One of the largest barriers to home ownership is paying the closing costs that are related to a home purchase.  These fees include origination fees, discount points, appraisal fees, processing and underwriting fees, title fees, prepaid taxes, prepaid insurance, etc, and they can add up to be thousand of dollars.  Fortunately, for recent college graduates who are buying a house, FHA loans allow the seller to pay up to 6% of the closing costs related to the transaction.  Typically, this should be enough to easily cover all closing costs.

2.  FHA loans have two great features that allow a recent college graduate to “Ease In” to their mortgage payment.

What does that mean?  FHA loans allow for you, a new home buyer, to take advantage of features that will initially reduce your payments through temporary interest subsidies.  These options are the FHA 2-1 Buy Down option and the FHA Interest Abatement option.

FHA 2-1 Buy Down

The FHA 2-1 buy down allows you to reduce the initial interest rate on your mortgage by 2% the first year of your loan and 1% the next year.  This is not an adjustable rate mortgage (ARM).  The FHA 2-1 buy down option works in conjunction with the FHA fixed rate program.  So, if you purchase a home with an FHA loan with a fixed rate of 5.5% (for example), the first year’s payment will be based on an interest rate of 3.5%, the second year’s payment will be based on an interest rate of 4.5% and the payment will be based on the 5.5% rate thereafter.  This is a great benefit to recent college graduates who are starting with entry-level salary but anticipate pay increases with experience.

FHA Interest Abatement Option

The FHA interest abatement option allows your interest payments to be paid on your behalf for up to six months.  As a result, your initial payments are very low.  For example, if you were to buy a home for $150,000.00 financed with a FHA loan at 5.5% (example), the principal and interest payment could be around $840 a month.  Of that amount, the interest portion of around $678 could be paid on your behalf.  The remaining payments (which will include the principal, taxes, insurance and mortgage insurance) are very low and affordable for up to the first six months.  This allows you to “ease in” to your payment.  This is a great benefit to recent college graduates who can use the amount saved to pay down other debts or buy furniture, fixtures and equipment for their new home (vacuums, law mower, etc.).

Typically, the subsidies required to operate these options are covered as part of the FHA-allowed seller paid closing costs.

1.  FHA has very low down payment requirements and multiple down payment assistance options.

As mentioned previously, closing costs are a significant barrier to home ownership for many recent college graduates.  But, the greatest barrier to home ownership is arguably the required down payment.  Because of the current status of the housing market, the majority of the “low down payment” mortgage programs are no longer available.  Even if the investor (e.g. Fannie Mae, Freddie Mac) will accept a low down payment program, most of the private mortgage insurance companies will not insure them.  In many areas that have been deemed a declining market, the minimum down payment on a conventional loan is 10%.  This could keep many college graduates with the goal of purchasing a home from being able to do so.  Fortunately, FHA insured loans still have a low down payment requirement of 3.5% and many different options regarding how you can come up with your down payment.

Down payments for FHA loans can come from you, a family member, an employer or charitable organizations.  If you do not have the proceeds required to make the down payment, FHA loans allow for you to receive a gift from a charitable organization, an employer, a blood relative, or an unrelated individual, as long as they can document evidence of a family-type, long-standing and substantial relationship.  A gift is cash given to you voluntarily and without compensation. No conditions may be attached to this gift, nor can repayment be expected or implied.

Suppose that you do not have a family member that is willing and/or able to gift you your down payment but they will lend it to you.  In the past, this was not acceptable, but last year the Housing and Economic Recovery Act of 2008 included a provision that caused FHA loans to allow you to borrower your down payment from a family member.

If that does not work for you, FHA loans allow you to borrow your down payment against a secured asset such as an automobile, artwork, collectibles, real estate, or financial assets (such as savings accounts, certificates of deposit, stocks, bonds, and 401(k) accounts).

FHA loans also allow for your down payment to come from various down payment assistance programs.  A significant source of down payment assistance is derived from the American Dream Downpayment Initiative (ADDI).  The American Dream Downpayment Initiative (ADDI) was signed into law by President Bush on December 16, 2003.  It provides down payment, closing costs, and rehabilitation assistance up to $10,000 or six percent of the purchase price of the home to first-time homebuyers.  ADDI funds are administered as part of the HOME Investment Partnerships Program (HOME) by state and local participating authorities and HUD-approved non-profit organizations.

So, there you have it, the top 10 reasons that you and all college graduates should use a FHA loan to buy your first home .  By taking advantage of FHA’s loan options, you will not have to wait.  FHA loan programs are extremely flexible and have numerous options and benefits.  In fact, there are so many that you may have noted that I had to consolidate some similar benefits in my “top 10” list.  I figured that “the top 15 reasons that you and all college graduates should use a FHA loan to buy your first home” just doesn’t have enough pizzazz.

If you have any questions or comments, please feel free to contact me or leave a comment.