The FHA mortgage program has been available for over 80 years but recently we have seen a surge in millennial home buyers using the program.  The FHA program offers borrowers of all ages several advantages and we outline below why this old school loan program attracts new school, millennial home buyers.

FHA mortgages are popular with millennial home buyers

More Flexible Borrower Qualification Requirements
The FHA mortgage program uses relatively flexible qualification requirements including a lower minimum required credit score and potentially higher debt-to-income ratio.  The minimum credit score required to qualify for an FHA loan is 580, which is lower than most mortgage programs.  And if you are willing to make a down payment of 10%, the minimum credit score is as low as 500.  Additionally, although the standard debt-to-income ratio limit for the FHA mortgage program is 43%, applicants with stronger financial and credit profiles may be able to qualify for a mortgage with a debt-to-income ratio over 50%.  The lower minimum credit score and higher maximum debt-to-income ratio make it easier for millennials to qualify for an FHA loan, especially if they have a limited credit profile or a few dings on their credit report.

• Use our FHA Qualification Calculator to determine what size FHA loan you can afford

Low Down Payment
The FHA mortgage program enables homebuyers to purchase a home with a down payment as low as 3.5% as compared to the 10% – 20% down payment required by many standard mortgage programs.  Saving money for a down payment can be one of the biggest obstacles to buying a home, especially for millennials with student loans or who struggle to make rent payments.  By reducing the down payment required to buy a home, the FHA mortgage program makes homeownership more attainable for millennial home buyers.

• Check out our comprehensive overview of the FHA Mortgage Program

Lower FHA Mortgage Rates
FHA mortgage rates are typically .250% – .500% lower than the interest rate for other low down payment mortgage programs.  The interest rate for an FHA loan is lower because the program is backed by the government and borrowers are required to pay FHA mortgage insurance, which protects the lender in the event of default or foreclosure.  Lower FHA mortgage rates bring down your monthly mortgage payment and potentially save you thousands of dollars in interest over the life of your loan.  Fiscally responsible millennials looking to save money on their mortgage payment are attracted to the lower interest rates offered by FHA loans.

• Compare FHA Mortgage Rates for leading lenders

Live Wherever You Want
Some low or no down payment loan programs require the property being mortgaged to be located in a specific geographic area to qualify for certain program benefits, such as a reduced mortgage rate.  The FHA mortgage program does not restrict where a property is located which means that millennials can use the program in any hip and up-and-coming neighborhood they want.

Earn As Much Money as You Want
The FHA mortgage program does not restrict how much money borrowers can earn.  Several other low or no down payment programs use a maximum income limit to determine borrower eligibility, which may reduce the number of borrowers that are eligible for the programs, especially in more expensive cities.  By not applying borrower income limits, the FHA mortgage program is available to millennial home buyers of all income levels.

Given the program benefits outlined above, you can understand why FHA mortgages appeal to millennials and prospective home buyers of any generation.

In our last FREEandCLEAR Mortgage Survey post we discussed how less than one in five borrowers learn about the mortgage process in high school or college.  If borrowers are not learning about mortgages in the classroom, where are they learning?  It turns out, most borrowers are turning to the Internet, their lender and real estate agents to understand how mortgages work.

According to the FREEandCLEAR Mortgage Survey, when we asked borrowers “from what source have you learned the most about the mortgage process”, the Internet and Lender tied for the top response, with both options garnering 24% of responses.  Realtor / real estate agent came in third, with 15% of responses as they continue to play an important, albeit secondary role, in the mortgage education process .  Not surprisingly, school only attracted 5% of responses, reinforcing our prior findings about how the education system fails mortgage borrowers.

It is also notable that only 2% of mortgage borrowers selected the Consumer Finance Protection Bureau (CFPB) as the source from which they have learned most about the mortgage process.  In fairness, the CFPB was established relatively recently which may help explain its lack of awareness or usage among borrowers in our survey.  Despite this, 2% is still a very low portion of responses in light of the CFPB’s significant resources and support.  While the CFPB can be a political lightning rod, it does offer a wide range of educational resources for prospective mortgage borrowers.

Most borrowers use the Internet and their lender to learn about mortgages

The results of the FREEandCLEAR Mortgage Survey illuminate several interesting points about how borrowers learn about mortgages.  First, more borrowers are turning to the Internet to research mortgages.  We expect this trend to grow over time as more millennials enter the home buying market.  Although the Internet can be an inconsistent information source, it is positive that borrowers have more free mortgage tools and resources available to them.

Second, borrowers continue to rely on their lenders to learn about the mortgage process.  While this finding seems somewhat obvious it raises issues about objectivity and potential conflicts of interest between lender and borrowers.  Turning to a lender for mortgage education works with qualified, ethical lenders but borrowers working with less established or experienced lenders may be disadvantaged.  Additionally, borrowers who consult multiple lenders are more likely to make informed mortgage decisions.

Finally, the FREEandCLEAR Mortgage Survey showed that 30% of borrowers learned about the mortgage  process from “Other” sources, underscoring the myriad methods that people use to learn about mortgages.

It is clear from our survey results that borrowers use numerous resources to learn about the mortgage process.  Whether they use the Internet, lenders, realtors or a government agency, the most important point is that borrowers seek to learn about mortgages and borrower education improves over time.  Educated borrowers makes more informed mortgage decisions which benefits all mortgage process participants.

We will continue to provide a detailed analysis of each survey question on our blog in the coming weeks and you can review the full results from the FREEandCLEAR Mortgage Survey to better understand how borrowers think about and experience the mortgage process.