FHA Mortgage Loans

 

An "FHA loan" is a mortgage insured by the Federal Housing Administration that can be issued by any federally qualified lender. The FHA established the mortgage program in 1934 to help lower income borrowers obtain a mortgage who would otherwise have trouble qualifying. Before then, it was common for potential homeowners to put down 50% of the value of the home as a down payment.

 

The FHA has a variety of programs for first-time homebuyers and reverse mortgages for senior citizens, and has insured more than 34 million mortgages since 1934.

FHA loans are government-backed, which protect lenders against defaults, making it possible to offer potential borrowers lower interest rates. Keep in mind that the FHA doesn't actually lend money to borrowers, nor does the agency set the interest rates on FHA loans.

FHA loans are available for both purchases and refinances, including cash out refinances. FHA loans can be used to finance residential 1-4 unit properties, including condominiums, manufactured homes and mobile homes (provided it is on a permanent foundation), but you may only hold one FHA loan at any given time.

Because FHA loans are government-insured, they have easier credit qualifying guidelines than most lenders, as well as relatively low closing costs and down payment requirements. With an FHA loan, your down payment can be as low as 3% of the purchase price, and closing costs can be bundled with the loan amount.

Another advantage of an FHA loan is that they start at lower-than-market interest rates, and carry fewer costs than conventional mortgages. FHA loans can be either adjustable-rate mortgages or fixed-rate mortgages. If the interest rate is adjustable, it will be based on the 1-Year Constant Maturity Treasury Index, which is the most widely used mortgage index.

If the loan-to-value is greater than 80%, mortgage insurance is required. FHA loans have an up front mortgage insurance premium equal to 1.5% of the loan amount. This is typically bundled into the loan amount and paid throughout the life of the loan. If the loan-to-value exceeds 90%, you will have to pay an annual mortgage insurance premium of 0.5% of the loan amount until the loan balance falls back below the limit.

The FHA does have guidelines that need to be met, but generally makes it easy for potential homeowners to qualify for a loan.

Make sure you compare FHA loans with conventional loans as well. There will be cases when the benefit of one outweighs the other. FHA loans are not guaranteed to be a better deal than other mortgages, so take the time to shop around. And watch out for unscrupulous FHA-qualified lenders who may try to misinform you.

 

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