Federal Housing Authority (FHA) loans are one of the most popular mortgage programs, particularly for first-time buyers. The FHA does not lend money; instead, it insures loans made by FHA-approved lenders to reduce the risk if the borrower later defaults on the loan. This guarantee allows lenders to provide loans to borrowers who otherwise could not qualify for a loan. This includes borrowers with lower income, an average credit score, or very little saved up for a down payment.
FHA mortgages have been available since the 1930s. This loan program was created after a period of many foreclosures and defaults, and it was designed to give lenders insurance against risk and make loans more accessible to the public.
You can choose between two types of FHA 203k home loans: the regular loan option or the streamlined version. The regular 203k loan has a maximum loan amount of the as-is value of the home with repairs, or 110% of the home's estimated after-repair value, whichever is less. With a Streamline FHA 203k mortgage, you can get a loan for the purchase price of the home with up to $35,000 in repairs.
You can also choose between a fixed-rate or adjustable-rate loan, and a term of 15 years or 30 years. Rates for 203k loans are slightly higher than regular FHA mortgages, but this type of loan is usually the best and most affordable way to buy and repair a fixer upper.
FHA mortgages have several advantages, including:
Despite the benefits, there are downsides to getting FHA loans. FHA insured loans have higher costs than many loan products, including conventional loans. The biggest expense is mortgage insurance premiums which are charged as a one-time upfront payment that can be rolled into the loan, and an annual premium which is charged monthly.
All FHA mortgages must carry mortgage insurance premiums, or MIP, regardless of the amount of the down payment. Unlike private mortgage insurance (PMI) with a conventional mortgage, these premiums remain for the life of the loan.
There are two components to FHA mortgage insurance:
FHA mortgages are easier to obtain than conventional mortgages. The following are requirements to get approved.