FHA Loans

FHA Loans

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.

FHA Loan

How FHA 203k Loans Work

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.

Benefits of FHA Loans

Benefits of an FHA Loan

FHA mortgages have several advantages, including:

  • Down payment as low as 3.5%
  • Closing costs and down payment funds can be gifted
  • Closing costs can be financed
  • FHA loans are easier to obtain following foreclosure or bankruptcy
  • Underwriting focuses on income, employment, and job security rather than credit
  • No prepayment penalties
  • Loans are assumable
Annual MIP

Disadvantages of an FHA Loan

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:

  • The upfront mortgage insurance premium is a premium of 1.75%. For a $300,000 FHA loan, this is $5,250.
  • The annual premium is charged monthly. Your annual MIP depends on your loan-to-value ratio and the term of your loan. It can range from 0.45% to 1.35%. The longer the term, the higher the premium.
FHA Loan Requirements

Qualifying for an FHA Loan

FHA mortgages are easier to obtain than conventional mortgages. The following are requirements to get approved.

  • Must have stable employment history (either in the same field or preferably with the same employer) for at least 2 years
  • Down payment of at least 3.5%, which may be gifted
  • Front-end ratio of 31% or less of gross monthly income.
  • Back-end ratio of 43% or less.
  • Credit score of at least 580 (Note: Lenders usually have their own standards and require a higher score, typically around 620)
  • Bankruptcy must be discharged for 2 years; 3 years out of foreclosure
  • Property appraisal must be conducted by an FHA-approved home appraiser
  • Property must be the primary residence

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