BankRate published a helpful article for new homebuyers that outlined important facts about FHA home loans. In the wake of the housing bubble’s collapse, FHA loans have taken on renewed importance for today’s mortgage borrowers. Simply stated, an FHA mortgage is a home loan insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan. Because of that insurance, lenders can — and do — offer FHA home mortgages at attractive mortgage rates and with less stringent and more flexible qualification requirements.
The FHA doesn’t mandate a minimum credit score, according to Vicki Bott, HUD deputy assistant secretary for single-family housing. Instead, each borrower’s creditworthiness is considered in context. However, FHA lenders can overlay their own requirements on top of the FHA guidelines. Some lenders might require a minimum credit score. Ask the loan officer about such a requirement if you have bad credit. “Lenders underwrite FHA home loans to ensure that the customer has the willingness and capability to repay the loan, but we do have flexibility beyond pure credit score to look at the borrower’s financial situation,” Bott says.
The FHA requires a down payment of just 3.5% of the purchase price of the home. That’s a fraction of the %age typically required on most other loans and a “huge attraction,” says Dennis Geist, vice president of government programs at Wells Fargo Home Mortgage in Carlsbad, California. Borrowers can use their own savings to make the down payment. But other allowed sources of cash include a gift from a family member, or a grant from a state or local government down payment assistance program.
The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an inducement for the borrower to buy a new home. FHA mortgage lenders typically charge a higher interest rate on the loan if they agree to pay closing costs. Borrowers can use the good faith estimate of closing costs — commonly known as the GFE — to compare interest rates and closing costs on different loans and figure out which option makes the most sense.
Because the FHA is not a lender, but rather an insurance fund, borrowers need to get their loan through an FHA-approved lender. Not all FHA-approved lenders offer the same interest rate and costs — even on the same FHA loan. That’s another reason Bott says borrowers should shop around. “We encourage consumers — from a cost, service and underwriting standard — to shop around many lenders or mortgage brokers to make sure they understand what the best fit is for their particular situation,” she says.
Two mortgage insurance premiums are required on all FHA home loans: The upfront premium is 2.25 % of the loan amount, and the annual premium is 0.55% of the loan amount. The upfront premium must be paid when the borrower gets the loan but can be financed as part of the loan amount. The annual premium is paid in chunks of 1/12th of the total along with each month’s mortgage payment. “The perception is that that sounds expensive,” Geist says. However, he adds, borrowers need to compare the FHA-insured loan to a loan that’s not FHA-insured (and consequently requires a much larger down payment). In many cases, the FHA loan is still the best choice, he says.
The FHA has a special loan product for borrowers who need extra cash to make repairs to their homes. The chief advantage of this type of loan, called a 203k, is that the loan amount is based not on the current appraised value of the home but on the projected value after the repairs are completed. The FHA 203k loan allows the borrower to finance up to $3,500 in nonstructural repairs, such as painting and replacing cabinets or fixtures, Geist says.
FHA insurance isn’t intended to be an easy out for borrowers who feel unhappy about their mortgage payments. But loan servicers can offer some relief to borrowers who have an FHA-insured loan, have suffered a serious financial hardship and are struggling to make their payments. That relief might be a temporary period of forbearance, a loan modification that would lower the interest rate or extend the payback period, or a deferral of part of the loan balance at no interest.
FHA Lending, FHA Loan Articles, Published Loan Articles
FHA home mortgages, FHA mortgage lenders
