FHA, known as the Federal Housing Administration, offers a mortgage loan requiring borrowers to have mortgage insurance on the loan. The FHA loan originated during the great depression and has contributed to the growth of the housing market ever since. FHA loans are targeted to borrowers with low to moderate income who are unable to make a large down payment. Here are some facts about FHA loans to consider before you buy a home.
1. Less Risk For the Lender
This is a less risky investment for the lender since they are protected from loss by mortgage insurance in case the borrower defaults on the loan.
2. Loan Types
FHA loans come in many different packages. There are adjustable and fixed rate mortgage loans that are allowed under the FHA loan program. You can even refinance and change your rate from fixed to adjustable or visa versa.
3. Low Down-Payment
Most FHA loans require only 3.5% down-payment on the total price of the home depending on the individual or joint applicant’s financial situation. To make the down-payment, home-buyers can use money from their savings or from a cash gift from a family member, employer, labor union, or government institution. You may also be able to borrow against or withdraw money from your Traditional IRA, Roth IRA, or 401(k) retirement savings plan without a penalty.
4. Insurance Premiums
The FHA is not a lender, it is an insurer. They require an upfront mortgage insurance premium (UFMIP) that is a percentage of the loan amount that is due at the time of closing. This is usually included in the total loan amount and is 1.75%. There is also monthly mortgage insurance that is currently .85% of the loan amount annually, for 3.5% down payment loans.
5. Comparison Shopping
FHA loan interest rates can vary depending on the mortgage lender. Since the FHA is only an insurance provider the lender has the flexibility to make their own rates and terms for the loan. It is important to shop around when considering an FHA mortgage, but also consider experience, fees, execution, document security and reviews when shopping for a loan.
Like most loans, FHA loans must be for a house that is a permanent structure built on a foundation. Therefore houseboats, treehouses, yurts, and mobile homes do not qualify for this type of loan.
If you need a loan to renovate a property you can consider the FHA 203(k) loan. The FHA 203(k) renovation loan program provides money for both the purchase and renovation of a home. When you are closing on the loan, renovation funds are held in escrow to pay for the estimated work to be completed by approved contractors.
Tip: Avoid making large purchases on your credit card(s) before applying for a mortgage loan or directly after being pre-approved. Watch this video for more information.