All About FHA Mortgage Loans

WHAT IS AN FHA LOAN?

In reality, FHA, (Federal Housing Administration) loans are not loans at all.  FHA only insures loans so that lenders are then able to offer mortgage assistance to people who might otherwise not qualify.  But the program is available to ANY buyer who wants to buy a home as their primary residence.  In the current market, the share of loans that are FHA has increased dramatically because many borrowers with good credit cannot qualify for a regular conventional mortgage.

Borrowers who want an FHA mortgage might have the following in their history:

• Fair or poor credit
• A low down payment (must have at least 3.5%)
• A previous bankruptcy
• A previous foreclosure

Essentially, the federal government insures loans for FHA-approved lenders so that lenders reduce their risk of loss if they lend to borrowers who have a higher probability of defaulting on their mortgage payments.  The FHA program has been in place since the 1930s to help stimulate the housing market by making loans accessible and affordable.  Traditionally, FHA loans have helped military families who return from war, the elderly, handicapped, or lower-income families, but really, anyone can get an FHA loan – they are not just for first-time home buyers.

WHAT ARE THE ADVANTAGES OF AN FHA LOAN?

An FHA loan is the easiest type of mortgage loan to qualify for because it requires a low down payment and you can have less-than-perfect credit.  Also, because FHA insures your mortgage (in case you should default), lenders are more willing to underwrite and approve your loan.  Another advantage of an FHA loan is it’s assumable.  This means if you want to sell your home, the buyer can “assume” the loan you currently have.  This option is most beneficial in times of higher interest rates.  FHA loans can be used for a home purchase or a refinance.

HOW DO I QUALIFY FOR AN FHA MORTGAGE LOAN?

These are the basic qualification criteria:

• Steady history of employment or worked for same employer for the last two years (exceptions can apply).
• A valid Social Security number, lawful residency in the U.S., and be of legal age to sign a mortgage in your state.
• Must make a minimum down payment of 3.5%.  It can be a gift from a family member (conventional financing does not allow down payment gifting).
• Must have a property appraisal from an FHA-approved appraiser and the property must meet certain minimum standards.
• The mortgage payment (including principal, interest, property taxes, and homeowner insurance) needs to meet FHA maximum guidelines based on gross monthly income.
• Monthly debt (mortgage, credit cards, auto, student loans, etc.) cannot be more than FHA maximum guidelines based on gross monthly income.
• Must be two years out of bankruptcy, with good established credit after the bankruptcy.
• Must be three years out of foreclosure, with good established credit after the foreclosure.

ARE THERE ANY DISADVANTAGES TO AN FHA MORTGAGE?

Yes, but nothing major or out of the ordinary.  First, there is a limitation on the maximum mortgage amount based on property location and number of units.   Check here.

Also, FHA loans, because of a slightly higher risk factor, require mortgage insurance premiums.  It is collected from the borrower in 2 ways.  One premium is paid in full in a lump sum at closing (usually) by adding the amount to the mortgage.  Though it can be paid out of pocket if the borrower wants to keep the financed amount lower.   The 2nd mortgage insurance premium required is a monthly payment which is included as part of the monthly payment.

Here’s how it works:

• Upfront mortgage insurance premium (MIP) — Appropriately named, this is an upfront monthly premium payment.  Borrowers will pay a premium of 1.75% of the loan amount.  Example: $200,000 loan x 1.75% = $3,500.00. This sum can be paid out-of-pocket at closing as part of the closing costs, or can be added to the mortgage.
• Annual MIP (paid monthly in loan payment) — This is a monthly charge that will be added to your mortgage payment.  It is based on the loan-to-value (LTV) ratio and term of the loan.  There are two different annual MIP values:  0.50% and 0.55%.  If the LTV is less than or equal to 95 percent, borrowers will pay 0.50%.  For LTVs above 95 percent, borrowers will pay 0.55% .  Example (for LTV less than 95%):  $200,000 loan x 0.5 = $1,000.00.   Then, divide $1,000.00 by 12. Your monthly premium is $83.33 per month.
• There is an exception for the monthly mortgage insurance when the borrower opts for a 15 year mortgage loan and has a down payment of at least 10%.  The upfront premium is still required.
• You can stop paying monthly mortgage insurance when your loan has been paid down to 78% of the lower of the purchase price or the appraised value at time of purchase.

WHAT TYPES OF LOAN PROGRAMS CAN I GET WITH FHA?

FHA offers these programs:

1. 30 year fixed
2. 15 year fixed
3. 5/1 ARM
4. 3/1 ARM

HOW CAN I APPLY FOR AN FHA MORTGAGE LOAN?

FHA may or may not be the best program for you.  When you apply, your application information will determine the best direction for you to go.   When you’re ready, give me a call and we’ll see what works best.

When applying for a FHA mortgage loan, it is important that you get an accurate statement of costs and monthly payments.  If the upfront mortgage insurance is calculated incorrectly or not calculated at all, your costs and payment will be off the mark.  A lender might quote ”lender fees” that do not include the upfront mortgage insurance.   Be sure to choose a lender and a loan professional experienced with FHA.

Tagged as: FHA Mortgage, First Time HomeBuyer, Purchasing a New Home