‘Dreamers’ can now get approved for FHA home loans
‘Dreamers’ — U.S. residents with DACA status — just got a huge boost to their homeownership dreams. The Federal Housing Administration (FHA) announced it had changed its policy on DACA home loans.
From this day forward, FHA is willing to approve home loans for DACA recipients — meaning they’ll get access to the low-down-payment FHA mortgage program that’s so popular with U.S. home buyers.
This new rule opens up the field of mortgage options for Dreamers, giving them access to a wider variety of affordable, accessible paths to homeownership.
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FHA’s new stance on DACA home loans
In a statement, U.S. Sen. Sherrod Brown (D-OH), who’s expected to soon chair the Senate Committee on Banking, Housing, and Urban Affairs, summed up what the change means: “DACA recipients are fully eligible for FHA loans.”
FHA’s new policy should make it easier for many Dreamers to buy real estate in the United States.
You might assume that this change was one of the first acts of the Biden administration. But, actually, it was one of the last of the outgoing Trump administration.
Previous FHA rules for DACA recipients
Official policy before January 19 (it was changed the day before it was announced) was that DACA recipients were ineligible for FHA loans.
According to the FHA Single Family Housing Handbook, “Non-US citizens without lawful residency in the U.S. are not eligible for FHA-insured mortgages.”
And up until January 19, those classified under the Deferred Action for Childhood Arrivals program (DACA) did not count as lawful residents according to HUD (the agency that manages the FHA).
FHA loans are one of the easiest mortgage programs to qualify for, having more lenient guidelines than many other home loans.
So for many Dreamers, the reversal of this policy is a significant change.
New FHA rules for Dreamers
Of course, the new rule only levels the playing field for DACA recipients.
Applicants still need to meet the same eligibility guidelines as every other lawful resident in order to get their FHA loan approved. More on those in a minute.
Note that Dreamers weren’t entirely locked out of homeownership even before the change.
They have always been eligible for some conventional loans, subject to lenders’ policies, including conforming ones that are offered by Fannie Mae.
FHA loan benefits
If Dreamers have been able to get some mortgage loans all along, what difference will access to FHA loans make?
Well, they’ll be able to access the same advantages that attracted more than 8 million borrowers who currently have single-family mortgages backed by the FHA.
Some of the biggest benefits of an FHA loan include:
- Small minimum down payment — Only 3.5% of the purchase price is required
- Lower credit score — Lenders approve applicants with FICO scores of just 580 and 3.5% down. You might even get a loan if yours is 500-579, if you can make a 10% down payment (though it will be harder to find a lender)
- More flexibility with existing debts — FHA loans typically allow higher debt-to-income ratios (DTIs) than other types of mortgages. So if you have a lot of existing debt, it could be easier to qualify
No wonder FHA loans are popular among first-time buyers and those who’ve been through difficult financial patches. And why they’re likely to appeal as DACA home loans.
One more thing. If you’re struggling to come up with a 3.5% down payment and cash for closing costs, explore the grants and loans (sometimes forgivable loans) that are open to homebuyers everywhere.
These down payment assistance programs are available in every state, and are often targeted toward first-time and lower-income home buyers who need a little extra help with their upfront housing costs.
FHA loan drawbacks
Inevitably, there’s a downside along with all those perks. FHA loans typically have higher borrowing costs than many other sorts of mortgage loans.
It’s not that FHA mortgage rates are higher. They’re actually pretty competitive.
Rather, the added cost comes from FHA loan mortgage insurance premiums (MIP).
MIP adds an upfront cost equal to 1.75% of your loan amount (most home buyers roll this into the mortgage balance). And it adds an annual cost equal to 0.85% of the loan balance (paid monthly).
Conventional loans charge mortgage insurance, too, if you put less than 20% down. But this can be canceled later on. With an FHA loan, by comparison, you have to refinance to get rid of MIP.
Mortgage insurance is not a bad thing if it helps you buy a home. But if you qualify for both an FHA loan and a conventional loan, be sure to compare the cost of mortgage insurance on each one so you understand which has higher long-term costs.
Which DACA recipients are eligible for an FHA mortgage?
If you’re a Dreamer, you may well find FHA loans appealing. And you’ll be anxious to know whether you personally are eligible.
So here, quoting extracts from the announcement, is what the FHA says borrowers will need:
- A valid Social Security Number (SSN), except for those employed by the World Bank, a foreign embassy, or equivalent employer identified by the Department of Housing and Urban Development (HUD)
- Eligibility to work in the U.S., as evidenced by the Employment Authorization Document issued by the USCIS
- To satisfy the same requirements, terms, and conditions as those for U.S. citizens
To the third point, those requirements include a credit score of at least 580; a down payment of at least 3.5%; and a debt-to-income ratio below 50%.
Your lender you apply with will require documents to verify credit, income, savings, and employment when you turn in your loan application.
You also need to make sure your loan amount (home price minus down payment) is within the FHA’s loan limits for your area.
FHA also requires that the property be your primary residence, meaning you must plan to live there full time.
Employment Authorization Document
That Employment Authorization Document is clearly central to your application succeeding. But suppose yours is due to expire within a year.
That shouldn’t be a problem. The FHA says:
“If the Employment Authorization Document will expire within one year and a prior history of residency status renewals exists, the lender may assume that continuation will be granted. If there are no prior renewals, the lender must determine the likelihood of renewal based on information from the USCIS.”
In other words, you should be fine if your status has already been renewed at least once. There’s an assumption it will be again.
If it hasn’t already been renewed, the lender will check with US Citizenship and Immigration Services (USCIS) to see how likely a renewal is.
Other home loan options for Dreamers
We already mentioned that some lenders of “conventional loans” (meaning those that are not backed by the government) consider applications from Dreamers.
Fannie Mae’s conforming loans are also open to those in the DACA program.
Most mortgage lenders offer loans backed by Fannie Mae, and these include a wide variety of options like:
- The 3% down Conventional 97 loan
- The 3% down HomeReady loan for low-income buyers
- Loans with less than 20% down WITH mortgage insurance (PMI)
- Loans with 20% down payment or more and NO mortgage insurance
The situation is less clear for Freddie Mac (the other agency that backs “conforming” home loans).
Freddie’s guidance uses language that was similar to the FHA’s old wording. And those who lacked “lawful residency status” were ineligible. A search of its website on the day this was written revealed no hits for “DACA” or related terms.
But it may well be that Freddie will soon update or clarify its DACA policies now that the FHA has — and now that a new, more Dreamer-friendly administration is in place.
And it would be no surprise if other organizations (including the VA and USDA) similarly refined their policies in coming weeks to reflect those factors.
If you’re a DACA recipient in the market for a home loan in the coming year, keep an eye on the news and do periodic Google searches of these agencies to see whether any new loan programs have been added to your list of options.
Which DACA home loans are best for you?
On average, DACA recipients are younger than the US population as a whole, because they had to be under 31 years as of June 15, 2012. But, besides that, it may be a mistake to generalize about them.
Just as other American residents, some Dreamers will have stellar credit scores and others bad ones. Some will have plenty of savings and others won’t. And some will be laden with student loans and other debts, while others owe nothing.
So a DACA borrower needs to seek out the type of loan that best suits their personal financial circumstances — just like everyone else.
Those most attractive to lenders (high credit scores, 20% down payment, and small debts) will likely find a conventional loan to be their best bet.
Those with low scores, 3.5% down payment, and lots of debts may need to go for FHA loans.
And those between the two might find Fannie Mae offers their best deals. Better yet, Fannie requires a minimum down payment of just 3%.
Shop for loan options and mortgage rates
Whichever type of loan you choose, be aware that you’ll be borrowing from a private lender. The mortgage rates and overall deals you’ll be offered are likely to vary widely from one lender to the next.
So be sure to comparison shop for your mortgage, getting competitive quotes from several lenders and comparing them side by side.
That’s the best way to find a low interest rate and save money on your home loan, no matter which program you choose.