FHA loans still offer advantages in 2014

It's true that FHA mortgage loans are more expensive in 2014. But as mortgage rates and premiums rise, it's also true that FHA borrowers have an advantage over those with conventional mortgages: FHA loans are assumable, which means that when it comes time to sell, buyers can take over sellers' existing FHA loans instead of taking out new mortgages at current mortgage rates. This is especially important as mortgage rates are expected to rise in 2014.

That enticement of a lower (future) interest rate can help you attract a greater number of offers when it's time to sell.

Carla Blair-Gamblian, a home loan consultant for Veterans United Home Loans in Columbia, Mo., says that FHA loans will always have a place in the market despite their increased costs.

"Not everyone can qualify for a conventional loan, so comparing [conforming loans] to FHA loans across the board may not yield the best picture of what loan product is best," she says.

FHA advantages

Credit scores, down payment. The FHA requirements for credit score and down payments are far lower than for conventional loans. Borrowers with credit scores of at least 580 can qualify for an FHA loan with a down payment of just 3.5 percent, according to HUD.

“While an FHA-backed mortgage with FICO 580 is theoretically available to borrowers, many lenders add 'overlays' on these minimum requirements,” says Keith Gumbinger, vice president of HSH.com. “Loans with the lowest credit scores tend to default at a much higher rate, and lenders are afraid that if they issue too many loans that later fail, HUD will no longer allow them to write FHA-backed mortgages.”

Chris Fox, president of F&B Financial Group in St. Louis, says that borrowers must have credit scores of at least 620 or 640 to qualify for most conventional loans. Fox also says, though, that this is a bit of a misleading benefit. He says that not many lenders will approve any loan, conforming or FHA, for borrowers with credit scores under 620.