HA mortgages are insured by the Federal Housing Administration, a federal agency within the Department of Housing and Urban Development. Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
Given that FHA mortgages are government-assisted alternatives to conventional financing, they are great options for those who want to put less money down or who have lower credit scores. They are popular for home purchases and for refinancing. While these mortgages do require expenses in the form of monthly mortgage insurance, they still enable many homeowners who don’t qualify for conventional financing to purchase or refinance a home. Over the past five years, the mortgage lending landscape has embraced FHA loans and allowed them to fill in the void that was left by all the potential homebuyers that could not qualify for a conventional mortgage. As we have seen conventional programs tighten their guidelines, more and more people are choosing FHA as their method for obtaining residential home financing.
What Are the Advantages of FHA Loans?
Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. An FHA down payment of 3.5 percent is required. Borrowers who cannot afford a traditional down payment of 20 percent or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.
•Put as little as 3.5% down
•Qualify with less-than-perfect credit
•Bankruptcies and foreclosures will not immediately disqualify a borrower
•No pre-payment penalties
•Close in as little as three weeks
What Are the Disadvantages of an FHA Mortgage?
If there weren’t any downsides to FHA financing, conventional financing would essentially be wiped out. Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront – usually financed into the mortgage – and the other is a monthly mortgage insurance payment. FHA loans also require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.
Upfront mortgage insurance premium (MIP)
Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $100,000 loan x 1.75% = $1,750. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage (almost all borrowers choose to have it added to the principle of the loan).
Annual MIP (charged monthly)
Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower’s loan-to-value (LTV) ratio, loan size, and length of the loan. There are different Annual MIP values for loans with a term greater than 15 years and loans with a term of less than or equal to 15 years.
Loans with a term of greater than 15 Years and Loan amount < or =$625,000.
- Loans with a term of greater than 15 Years and Loan amount < or = $625,000
- LTV less than or equal to 95 percent, annual premiums are 1.30%
- LTV above 95 percent, annual premiums are 1.35%.
Loans with a term of 15 Years and Loan amount < 0r = 625,000.
- Loans with a term of 15 years or less and Loan amount < or = $625,000
- LTV less than or equal to 90 percent, annual premiums are .45%
- LTV above 90 percent, annual premiums are .70%
Example (for LTV less than 95 percent on a 30 year loan): $300,000 loan x 1.30% = $3,900. Then, divide $3,900 by 12 months = $325. Your monthly premium is $325 per month.
IMPORTANT NOTE: The Mortgage Insurance will be in your payments for the entire loan term if your LTV is >90%. If your LTV is = or < 90%, the Mortgage Premium will be for the mortgage term or 11 years, whichever occurs first.
Single-family home mortgages with amortization terms of 15 years or less and a loan-to-value (LTV) ratio of 78 percent or less remain exempt from the annual MIP.
FHA Loan Requirements
• Must have a steady employment history or worked for the same employer for the past two years (exceptions to this rule can be made)
• Must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state
• Must make a minimum down payment of 3.5 percent. The money can be gifted by a family member.
• New FHA loans are only available for primary residence occupancy
• Must have a property appraisal from an FHA-approved appraiser
• A minimum credit score of 620 for maximum financing with a minimum down payment of 3.5 percent.
• A minimum credit score of 580 for a maximum LTV of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ creditworthiness.
• Typically you must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
• Typically you must be three years out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
Property needs to meet certain standards: An FHA loan requires that a property meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to explore the option of obtaining a 203k (FHA Rehabilitation) loan. Keep current on the premium costs for FHA loans by visiting the U.S. Department of Housing and Urban Development (HUD).