February 13th, 2018 6:39 AM by Jackie A. Graves, President
FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal
Housing Administration (FHA). FHA loans are designed for
low-to-moderate income borrowers who are unable to make a large down payment.
of 2018, these loans allow the borrower to borrow up to 96.5% of the value of
the home (with a credit score of at least 580; otherwise, a 10% down payment is
required). The 3.5% down payment requirement can come from a gift or a grant,
which makes FHA loans popular with first-time
loans were introduced after the Great Depression in the 1930s. During this
time, defaults and foreclosures skyrocketed.
In response, the government created federally insured loans that gave mortgage
lenders peace of mind, reduced lender risk and stimulated the housing
market. By insuring mortgages, lenders were (and still are) more inclined to
issue large mortgages in cases where they normally would not have approved the
loans are offered to low-income individuals who have credit scores as
low as 500. Individuals with a credit score between 500-579 can obtain an FHA
loan with a down payment of 10%; individuals with a credit score higher than
580 can get an FHA loan with as little as 3.5% down. The Federal Housing
Administration does not lend the borrower the money to take on a mortgage or to
buy the house. Rather, the borrower pays a monthly or annual mortgage
insurance premium to the FHA to insure the loan, which the
lending institution issues to him or her. In case of default, the lender’s
financial risk is minimized because the FHA would step in to cover the
history is not a problem with an FHA loan. Instead of your credit report, the
lender may look at other payment-history records, such as utility and rent
payments. Even people who have gone through bankruptcy and foreclosure may
still qualify for an FHA loan. However, the lower the credit score and the
lower the down payment, the higher the interest rate.
In addition to the traditional first mortgages, the FHA offers a
reverse mortgage program known as Home Equity Conversion Mortgage (HECM). This program
helps seniors convert the equity in their homes to cash while retaining the
titles to their homes. FHA also offers a special product known as an FHA 203(k) loan, which factors in the cost of certain repairs
and renovations into the loan. This one loan allows an individual to borrow
money for both a home purchase and home improvement. This can make a big
difference for a borrower who does not have a lot of cash on hand after making
the down payment. The FHA’s Energy Efficient Mortgage program is a similar
concept, but aimed at upgrades that lower the utility bill. The cost of newer,
more efficient appliances, for example, becomes part of the loan.
order for an FHA loan to be approved, the borrower must have mortgage insurance. An FHA
loan requires two types of mortgage insurance premiums (MIP) to be made by the
borrower – an Upfront Mortgage Insurance Premium (UPMIP)
and an Annual MIP. The upfront MIP is equal to 1.75% of the loan amount (as of
2018) and is paid at the time of closing. A borrower who was issued a home loan
for $350,000 will have to pay a UPMIP of 1.75% x $350,000 = $6,125. The
payments are deposited into an escrow account set up by the US Treasury
Department, and the funds are used to make mortgage payments in case the borrower defaults.
annual MIP payments are made every month by the borrower. The payments
vary according to the loan amount, length of the loan, and the original loan-to-value ratio (LTV). The typical MIP cost is
usually 0.85% of the loan amount. Following our example above, the borrower
would have to make annual MIP payments of 0.85% x $350,000 = $2,975, or $247.92
monthly. This is to be paid in addition to the cost of UPMIP.
you buy a home, you may be responsible for certain out-of-pocket expenses such as loan origination fees,
attorney fees, and appraisal costs. One of the advantages of an FHA mortgage is
that the seller, home builder or lender is allowed to pay some of these closing costs on your behalf. If the seller is having a
hard time finding a buyer, he or she might just offer to help you out at
closing time as a deal sweetener.
FHA loans give mortgage opportunities to people with low income or low credit
and people who may be first-time homebuyers, there are specific lending
requirements outlined by the Federal Housing Authority.
a borrower must have a steady history of employment or worked for the same
employer for the past two years. This is important because the FHA requires a
ratio – which is the summation of the monthly mortgage
payment, HOA fees, property taxes, mortgage insurance and homeowner’s
insurance – be less than 31% of total gross income. However, it is possible to
be approved with a 40% ratio. Additionally, a borrower's back-end ratio –
which is the summation of the monthly mortgage payment and all other monthly
consumer debts – is required to be less than 43% of total gross income.
However, it is possible to be approved with a ratio as high as 50%.
who are self-employed will need two years of successful self-employment
history, documented by tax returns and a current year-to-date balance sheet and profit and loss statement.
Applicants who have been self-employed for fewer than two years but more than
one year can be eligible if they have a solid work and income history for the
two years preceding self-employment and the self-employment is in the same or a
borrowers must be at least two years out of bankruptcy, unless a borrower who
has recently gone through bankruptcy has demonstrated that it was an
uncontrollable circumstance. Borrowers must also be at least three years
removed from any foreclosures and demonstrate that they are working toward
re-establishing good credit. However, a borrower who is delinquent on his/her federal student loans or income taxes, won’t
qualify for an FHA loan. A borrower must also be of legal age in the state
where he is applying for a mortgage, have a valid Social Security
Number and be a lawful US resident.
general, a property financed with an FHA loan must be the borrower's principal
residence and must be owner-occupied. This loan program cannot
be used for investment or rental
properties. Detached and semi-detached houses, townhouses, row
houses and condos within FHA-approved condo projects are all eligible for FHA
the lending institution that the borrower is using must be approved by the FHA
board since the FHA is not a lender, but an insurer. In other words, the money
for an FHA mortgage is not given to borrowers by the FHA; rather, borrowers
receive the funds from an FHA-approved lender, and the FHA guarantees the loan.
On one hand, this means that different lending institutions might offer the
borrower a very similar mortgage (or might turn the borrower down)
because the FHA’s loan guidelines don't change based on who money can be
borrowed from. On the other hand, the FHA offers lenders flexibility in setting
their own standards for determining loan eligibility, and many lenders’ minimum
requirements are higher than those set by the FHA. As a result, one institution
may approve an FHA loan while another rejects it.
an FHA loan may sound great, it is not for everybody. People with credit scores
less than 500 will usually not be eligible for an FHA loan.
borrower who can afford a large down payment may be better off going with a conventional
mortgage as they could save more money in the long run through
the lower interest rates and mortgage insurance premium that conventional
to an FHA advisor to determine whether this type of mortgage is right for you.
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