You would be hard-pressed to underestimate the importance of an FHA loan. First of all, an FHA loan is a government-backed mortgage that is insured by the Federal Housing Administration, which is where the initials “FHA” comes from. Needless to say, FHA loans are quite popular with first-time home buyers. This is because an FHA loan is often easier to get, requiring a lower minimum credit score and less of a down payment than traditional mortgages. The government will ensure the loans, but the lender will usually be an institution that has been approved by the Federal Housing Administration.
With an FHA home mortgage, you usually can expect a fixed rated of either 15 or 30 years.
Understanding FHA Home Loans
An FHA mortgage works by allowing borrowers who may not have a high income or the best income still be able to qualify for a mortgage. It is a great way to become a homeowner at a reduced rate. However, there’s a catch. All FHA mortgage holders must pay into the FHA mortgage insurance plan so that the lender is protected in case the borrower defaults on their loan.
Because an individual applying for an FHA loan will often put down less than 20 percent of the home mortgage, this insurance will be required.
When you finance your FHA mortgage, you will have to pay an upfront mortgage insurance premium of 1.75 percent of the total amount of the mortgage. If you are having difficulty coming up with this initial premium, don’t fret; the fee can often be rolled into the amount financed by the loan.
After this step is completed, you will have to pay an annual mortgage insurance premium of either 0.45 percent or 1.05 percent. Your rate depends on whether you have a fifteen-year note or a thirty-year note, and it also depends on your loan-to-value ratio. Generally, you would multiply the mortgage amount by your rate and then divide by twelve to get your monthly payment.
For example, let’s say you borrow for an FHA loan of $200,000. Your initial mortgage insurance payment is going to be $3,500 and your annual mortgage insurance premium is going to consist of an annual payment of $900 and a monthly payment of $75 if you have a 15-year mortgage. On a thirty-year mortgage, you would have an annual payment of $2,100 and a monthly payment of $175.
Can FHA mortgage insurance be canceled? No, not in most cases. Usually, about the only way you can get out of paying FHA mortgage insurance would be to either refinance your home to a non-FHA loan or to sell the house outright. Regardless of these factors, FHA loans tend to be popular with first-time buyers and those with lower incomes or poor credit scores. The beauty of the FHA loan is that you can even be a repeat buyer as long as the loan is going to go towards the purchase of a primary residence!
Another set of good news would be that in order to become an FHA-approved lender, a banking institution must commit to only charging between 3 and 5 percent on closing costs. The FHA will allow builders, lenders and home sellers to only have to pay up to six percent on such closing costs as credit reports, title searches and home appraisals.
How do I qualify for an FHA loan?
Borrowers must meet a number of lending guidelines in order to qualify for an FHA loan, including the following:
A FICO score between 500 and 579 if they want to be approved for the 10 percent down FHA option or a FICO of 580 or higher if they want to qualify for an FHA loan with only 3.5 percent down.
A verification of their employment history for at least the past two years.
Verifiable income; this can be accomplished through bank statements, pay stubs and federal tax returns.
The loan must be used for a primary residence.
The property is to be appraised by an FHA-affiliated appraiser and the home should meet all HUD guidelines.
The front end debt ratio (monthly mortgage payment) must not exceed 31 percent of your income. Some lenders might allow 40 percent of your gross monthly income in some cases.
If you have gone through bankruptcy before, you must allow for at least 12 to 24 months to apply for an FHA loan. If the home is being foreclosed upon, you must be bankruptcy-free for at least 36 months.
FHA vs. Conventional Loans
One of the main differences between FHA loans and conventional loans is that traditional loans are not insured by the federal government. Moreover, if you at some point want to qualify for a conventional loan, you will normally need a solid income, higher credit score, and higher down payment.
Types of FHA Loans
The Federal Housing Administration offers a lot more than just the prototypical FHA loans. They also have the ability to insure other types of FHA loans as well. Consider some of these examples:
FHA 203 (k) Loans: This FHA loan type exists to help buyers who want to purchase a home that is deemed a “fixer-upper.” Borrowers have the added benefit of being able to roll the cost of repairs and the cost of the home into one mortgage. An FHA k loans come in two different types:
Streamlined or Limited 203 (k): This loan type is available for those who are buying a home with improvements that will only total $35,000 or less. The paperwork is easier with this type.
Standard 203 (k): This is the full-fledged type of FHA improvement loan, and it will require much more paperwork than the limited version. The home will need to have improvements that cost more than $35,000 to qualify for this type. Both of these types have a $5,000 minimum for rehabilitating the home.
Home Equity Conversion Mortgage (HECM): The FHA also helps people with their retirement plans too. The HECM is one example, and it is for senior citizens aged 62 and older who either have significant equity or have their home paid off outright and want to have a reverse mortgage.
FHA Energy Efficient Mortgage (EEM): The FHA encourages individuals to purchase homes that are energy-efficient. They also have programs that can help the new homeowner make their home more energy-efficient.
FHA Section 245(a) Mortgage: This is also known as the Graduated Payment Mortgage, and it allows borrowers to raise their mortgage payment over time. This program works best for those who will incomes that increase over time. There are five different plans, and they are categorized by how much the rates will increase over a specific time period.