What are FHA loans?

What is an FHA Loan? An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance,  which protects the lender from a loss if the borrower defaults on the loan. Minimum credit scores for FHA loans depend on the type of loan the borrower needs. To get a mortgage with a down payment as low as 3.5 percent, the borrower needs a credit score of 580 or higher. Those with credit scores between 500 and 579 must make down payments of at least 10 percent. People with credit scores under 500 generally are ineligible for FHA loans. The FHA will make allowances under certain circumstances for applicants who have what it calls non-traditional credit history or insufficient credit if they meet requirements.

FHA loans are popular for first time home buyers. 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. For most borrowers, the FHA requires a down payment of just 3.5 percent of the purchase price of the home. FHA borrowers can use their own savings to make the down payment. But other allowed sources  include a gift from a family member or a grant from a state or local government down-payment assistance program. The FHA also allows home sellers including builders and lenders to pay some of the borrower’s closing costs, such as an appraisal fees, credit report fees or title expenses.

Two mortgage insurance premiums are required on all FHA loans: The upfront premium is 1.75 percent of the loan amount — $1,750 for a $100,000 loan. This upfront premium is paid when the borrower gets the loan. It can be financed as part of the loan amount. The second is called the annual premium, although it is paid monthly. It varies based on the length of the loan, the loan amount and the initial loan-to-value ratio, or LTV. How long do borrowers have to pay FHA Mortgage Insurance? The duration of your annual MIP will depend on the amortization term and LTV ratio on your loan origination date: For loans with FHA case numbers assigned on or after June 3, 2013:

Borrowers will have to pay mortgage insurance for the entire loan term if the LTV is greater than 90% at the time the loan was originated. If your LTV was 90% or less, the borrower will pay mortgage insurance for mortgage term or 11 years, whichever occurs first.

An advantage of an FHA loan it is an assumable mortgage which means if you want to sell your home, the buyer can “assume” the loan you have. Also 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. Also FHA loans are eligible for streamline refinances which are a cheaper and quicker way to refinance your mortgage in a low interest rate period. FHA loans are normally priced lower than comparable conventional loans.

The FHA is much more lenient on maximum debt-to-income ratios. Typical max DTI  is 45% which can be as high as 50% in some cases, Your debt-to-income ratio is a major determining factor in how much you can borrow. This calculation is the percentage of your monthly income minus monthly obligations.

Some restrictions on FHA are you can only use FHA financing for a home that is going to be owner occupied, and not all condo’s qualify for FHA.

So the question you should be asking is an FHA loan right for me. The answer just depends upon your circumstance. Generally the answer is if have a 640 credit score or better with no bankruptcy or foreclosures, a conventional loan with only 3% down may be better. If your credit score is under 640, FHA may be your best or only option.