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The provision of financing for real estate investments has always been important to enable relevant development and investment activities to proceed. In the US and, indeed, many other countries, both private and public entities participate in providing loans or mortgages for multifamily real estate developments or investments but also for individual buyers to acquire their own home.
One such public provider of housing loans for individuals in the US is The Federal Housing Administration (FHA) which has recently announced a new 40-year mortgage. So, this week we will take a look at some of the benefits and challenges presented by such financing arrangements.
But first, what is the Federal Housing Association?
The Federal Housing Administration (FHA) is a United States government agency which is part of the Department of Housing and Urban Development (HUD). It was established during the Great Depression in the 1930s to help increase homeownership in the country by providing mortgage insurance to lenders.
FHA loans are popular amongst first-time homebuyers and those with lower credit scores or limited down payment funds. Such loans are designed to make it easier for individuals and families to purchase a home, as the agency’s insurance helps protect the lender against losses in case the borrower defaults on the loan.
Overview and objectives of the FHA 40-year mortgage
The FHA 40-year mortgage is a long-term financing option that is available to lower income buyers who are looking to purchase their own property. The mortgage is specifically designed for affordable housing units and it offers several benefits over traditional financing options. It is designed to help buyers finance the purchase and renovation of affordable housing units, with the aim of increasing the availability of affordable housing options for low- and moderate-income families
Key terms of FHA loans
Some of the key terms of FHA loans include:
The FHA requires that the borrower certifies their intent to live in the property as their primary residence for at least one year. However, this requirement can be waived for properties with 2-4 units, provided the borrower lives in one of the units;
FHA loans have limits on the loan amount, which may vary depending on the area. These limits may restrict the type of investment properties that can be financed using an FHA loan;
Whilst FHA loans are known for their low down payment requirements, s may still be required to put down a higher percentage compared to primary residence buyers;
FHA 203(k) Loans
buyers can also use FHA 203(k) loans to purchase and renovate properties. These loans provide funds for both the purchase and renovation costs in one mortgage.
Some benefits of FHA 40-year loans
There are several reasons why the new FHA 40-year mortgage is beneficial:
Lower interest rates
The low interest rates offered by the FHA 40-year mortgage can help buyers save money over the life of the loan. This can result in lower monthly payments and increased cash flow, which can be reinvested in the property or used for other investments.
Longer loan term
The 40-year loan term can provide property buyers with greater flexibility and stability over the life of the loan and different real estate cycles. This can help them manage their cashflow and reduce their monthly payments, which can be especially beneficial in the early years of the loan when cashflow is typically tighter.
The fully amortising nature of the loan means that buyers do not need to worry about a balloon payment at the end of the loan term. This can provide them with peace of mind and reduce the risk of potential default.
The FHA 40-year mortgage is specifically designed for affordable housing units, which can help buyers finance the purchase and renovation of, in some cases, 2-4 unit multifamily properties that provide affordable housing options for low- and moderate-income families. This can provide a sense of social responsibility and help them make a positive impact in their communities.
Challenges for loanees
One challenge is the upfront costs associated with the FHA 40-year mortgage. These costs can be higher than those for traditional loans, as investors may need to pay higher origination fees, mortgage insurance premiums as well as other closing costs. This can increase the overall cost of the loan and may make it less attractive to some buyers.
Furthermore, apart from owner occupiers, the FHA 40-year mortgage is only available, in some cases, for properties of between 2-4 units that provide affordable housing options for low- and moderate-income families. This means that not all properties qualify for this type of financing.
Finally, the FHA 40-year mortgage may restrict the ability of buyers to refinance their properties in the future. This is because the loan is insured by the FHA, which means that they may need to meet certain requirements in order to refinance their properties. This can limit the flexibility of those who may want to refinance their properties in order to take advantage of lower interest rates or other financing options.
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CPI Capital agrees that the new FHA 40-year mortgage can be a beneficial financing option for buyers who are looking to purchase or refinance affordable housing units. The lower interest rates and fully amortising nature of the loan provides buyers with greater flexibility and stability over the life of the loan.
It also allows them to secure longer-term financing for properties, which can improve cash flow and profitability. Coupled with the FHA’s mortgage insurance protecting lenders against losses, this can make it easier for buyers to obtain financing for their properties, ultimately leading to improvement in the housing stock shortage.
CIO, Co-Founder CPI Capital