June 14th, 2018 5:12 AM by Jackie A. Graves, President
lending standards and lower down-payment requirements make FHA loans popular
among mortgage borrowers.
is an FHA loan?
An FHA loan is a type of government-backed
mortgage insured by the Federal Housing Administration, a branch of
the U.S. Department of Housing and Urban Development, or HUD. FHA borrowers pay
for mortgage insurance, which protects the lender from a loss if the borrower
defaults on the loan.
Why homebuyers like FHA
are government-backed, FHA home loans have attractive interest rates and less stringent
applicants must meet credit-score and down-payment requirements, and show
proof of employment and a steady income. An appraisal of the home by an
FHA-approved appraiser also is required.
facts about FHA home loans
Here are seven
facts that borrowers should know about FHA loans.
You don’t need stellar credit to qualify
requirements for FHA loans depend on the down payment.
credit score before you borrow. Check it today for free at myBankrate.
credit scores under 500 generally are ineligible for FHA loans. However, there
may be some wiggle room there. The FHA does make allowances, under certain
circumstances, for applicants with “nontraditional credit history or
insufficient credit” if other criteria are met.
Ask your FHA
lender or an FHA loan specialist whether you qualify.
You must be out
of bankruptcy at least two years and not have had a foreclosure within the past
three years to get an FHA loan. In addition, you must be current with payments
on federal student loans and income taxes.
The minimum down payment is 3.5 percent
mortgage borrowers, the FHA requires only 3.5 percent of the home’s purchase
price as a down payment. For example, if you bought a $200,000 home, the
minimum down payment would be $7,000.
If you had a
conventional mortgage through a lender that required 20 percent down on that
$200,000 house, you’d have to come up with $40,000.
can use their savings, a financial gift from a family member or a government
grant for down-payment assistance.
counties, local housing authorities and nonprofits are all potential sources
for down-payment help. The National Council of
State Housing Agencies is a good resource for assistance programs.
Closing costs may be covered
The FHA allows
home sellers, builders and lenders to pay some of the borrower’s closing costs,
such as for an appraisal, credit report or title expenses. For example, a
builder might offer to pay closing costs as an incentive for the borrower to
buy a new home.
typically charge more interest on the loan if they agree to pay closing costs.
Borrowers can compare loan estimates from competing lenders to decide which
option is the best for them.
for closing costs will vary based on
the state you live in, the size of your loan and whether or not you pay points
to lower the interest rate.
required to give you a Good Faith Estimate, or GFE, within three business days
of your loan application. The GFE will give you a good idea early in the
process of what your closing costs will be.
HUD holds FHA
lenders to no more 3 percent to 5 percent of the loan amount for closing costs.
The lender must be FHA-approved
Because the FHA
is not a lender, borrowers get their home loans from FHA-approved
FHA-approved lenders have different rates and costs, even for the same loan.
FHA loans are
available through many sources — from the biggest banks and credit unions to
community banks and independent mortgage lenders.
and underwriting standards vary among lenders or mortgage brokers, so it’s important
to shop around.
There are two types of mortgage insurance to pay
insurance is required when borrowers pay down less than 20 percent. It insures
the mortgage for the lender in case the borrower defaults.
All FHA loans
require the borrower to pay two mortgage insurance premiums:
So, if you
borrow $150,000, your upfront mortgage insurance premium would be $2,625 and
your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25
You can borrow cash for home repairs
The FHA has a
special loan for borrowers who want extra cash to make repairs to their homes.
The chief advantage of this type of loan, called a 203(k), is that the loan
amount is not based on the current appraised value of the home, but on the
projected value after the repairs are completed.
“streamlined” 203(k) allows the borrower to finance up to $35,000 for
nonstructural repairs, such as painting and replacing cabinets or fixtures.
repairs an FHA 203(k) will cover:
One big benefit
of a 203(k) is that it allows you to buy a fixer-upper that you might not have
been able to afford otherwise. However, not all properties qualify and applying
for the loan can be difficult because a detailed proposal of the work and cost
estimates are required.
Loan limits are adjusted annually
Every year the
FHA changes the maximum loan amount (“ceiling”) that it will insure, and the
minimum loan limit (“floor”) it will insure. This is in response to shifting
floor limits vary according to the cost of living in a certain area. FHA limits
can vary from one county to the next. Areas with a higher cost of living will
have higher limits, and vice versa. Special exceptions are made for housing in
Alaska, Hawaii, Guam and the Virgin Islands, where home construction is more expensive.
For FHA home
loans in high-cost areas in 2018:
The loan limits
either stayed the same or increased from 2017. There were no U.S. counties
where loan limits were decreased. FHA ceilings are intended to be slightly
higher than the median home price in a particular area.
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