FHA Loan
FHA IS HERE TO STAY
What’s FHA (Federal Housing Administration) all about and why does it matter to you?
FHA is a department of HUD (Housing & Urban Development). Established in 1934, FHA has been serving the housing industry by providing Lenders “Insurance” enabling them to make loans available at below market rates.
You’re an FHA loan candidate if any of the following apply:
- First time buying a home.
- Low down payment requirements.
- Low monthly payments.
- Fixed rate loans.
- Your particular circumstances are different.
- You have blemished credit.
- For whatever reason you did not qualify for a Fannie Mae or Freddie Mac loan.
- You were turned down by your current Lender, Bank or Credit Union.
Whatever your circumstances, make sure you ask your loan officer about an FHA loan.
Lower Rate: The Government insures your loan in case of a default, making the loan more attractive to investors; thus a lower rate.
Smaller Down-payment: FHA does not require a large down-payment. It may be as low as 3% and can come from a family member, charitable organization, or your employer. Certain restrictions may apply so ask before executing your purchase contract.
Qualifying is Easier than with other mortgage loans: FHA mandate from Congress is to make home ownership available to all Americans. Consideration can be taken into many circumstances that would otherwise cause some Lenders to turn down your application. An example might be taking a leave of absence from your job to take care of a sick family member. Properly documented, FHA may consider this an exception for continuous job employment whereas other Lenders may not. Whatever the circumstances, you will need to document and prove your situation.
Blemishes on your Credit Report: FHA understands that people do have credit problems from time to time, possibly even a bankruptcy. Depending on your circumstances and how you have handled your credit after your credit problems, FHA may approve your loan. It is generally easier to qualify for an FHA loan than a conventional loan.
More protection to keep your home: FHA understands that borrowers run into trouble from time to time. FHA works with its borrowers and has developed plans to assist them in their time of need.
FHA insures loans for Lenders against defaults: Remember, FHA does not lend money; it only insures loans. You will need to find an approved FHA Mortgage Lender in your area.
FHA Loans can be used for the following:
- Purchase or refinance a new or existing 1-4 unit home.
- Purchase or refinance a condominium
- Purchase or refinance a manufactured or mobile home (provided it is on a permanent foundation)
FHA offers the following types of Loans:
Fixed-Rate Loans: FHA offers loans that are fixed rate; meaning that the interest rate never changes. They also offer 20, 30, and 40 year term loans.
Adjustable Rate Loans: FHA Adjustable Rate Mortgages (ARM) are for those that need a smaller payment at the beginning of their mortgage term. FHA adjustable rates change over the life of the loan but no more than 1-2% depending on the type of Adjustable Rate Mortgage (ARM) that you take out. FHA uses the 1-year Constant Maturity Treasury Index (CMT) to calculate the changes in your interest rate. The index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time.
203-K Loans: Purchase and/or Rehabilitation loans: If you are purchasing a home that needs some repairs or rehabbing, FHA has a single family Rehabilitation Loan Program (203K). Generally, your loan amount will include the purchase price plus the cost of rehab; subject to the appraised value of the property assuming the rehab had been completed. The advantage of this loan is that your new mortgage includes the cost of rehab which you can complete after the purchase of your home.
FHA Loans Compared to the old “SUB-Prime Loan” or “Non-Conforming Loans”
- Most Sub-Prime Loans were for borrowers with credit blemishes that could not qualify for a Conforming Loan; and thus charged a higher interest rate. FHA rates are always competitive and generally lower than conforming rates.
- Most Sub-Prime Loans were Adjustable Rate Mortgages. Most FHA loans are fixed rate loans.
- Most Sub-Prime Loans had pre-payment penalties. In other words, if you paid your loan off early you paid a premium to your Lender. FHA has no pre-payment penalties.
Luckily, there are few Sub-Prime Loans around today; make sure you ask about an FHA loan.
FHA Loans Compared to Conventional Loans
- Larger down-payments are generally required with Conventional Loans.
- Less than perfect credit may not qualify for a Conventional Loan.
FHA Negatives: You must buy Mortgage Insurance
You are required to buy Mortgage Insurance on all FHA loans. There are two mortgage insurance premiums. First is the up-front mortgage insurance premium that is paid at the closing of your loan. This amount is generally included in your loan amount and thus paid over the life of the loan. Secondly, there is the monthly mortgage insurance premium that is included with your mortgage payment that is paid monthly to the Lender.
The cost of mortgage insurance is dependent on the amount of your mortgage. Ask your loan officer for the exact amount of the up-front premium as well as the monthly amount. Even on some conforming loans that exceed 80% Loan to Value (LTV), Mortgage Insurance is a requirement.
FHA is a great value and opportunity for those that qualify. Make sure you ask about the availability of an FHA loan if you are purchasing or refinancing your home.
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