FHA insures home mortgage loans to buyers of homes with only a 3.5% down payment. The loans are available through lenders approved by FHA. They are traditionally known as first time home buyer’s programs due to the lower down payments and easy qualifying standards.
The loan limits are lower than many conventional loan programs though. To find out the FHA loan limits for a particular city or town, look here.
HUD has released new guidelines for FHA loan foreclosures, stating that anyone not current on their loan when applying for a short sale will be denied a future FHA loan for three years. These new rules do not apply to home owners who lost their homes due to unforeseen circumstances, such as unemployment.
MIP Insurance Required on all FHA Mortgage Loans
FHA charges the borrower an upfront fee of 1.5% for their MIP (Mortgage insurance premium) and then a .5% payment each month for the MIP premium. This MIP protects the lender in case the borrower would default on the loan. This fee for the insurance must stay on the property for five years if the home is financed for 30 years. If the home is financed for 15 years, the MIP is removed when the loan to value ratio drops to 89.9%.
How to Qualify for an FHA Mortgage Loan
FHA lenders allow a 29/41 debt to loan ratio. What this means is that the borrower can take 29% of their current income for the mortgage payment basis. Then take your income minus the monthly debts and add in the mortgage payment, taxes, insurance and MIP. This figure must equal to 41% of the borrower’s income.
FHA does allow a lower FICO (credit report) score than conventional loans and sometimes as low as 600 with a thorough explanation of discrepancies on the credit report. Conventional loans require a FICO score of 700 or more. FHA does require credit though. So if the borrower has no credit, he is encouraged to open a department store credit or a fully secured savings loan. There needs to be at least two months of credit reporting on the credit report.
Benefits of a FHA Mortgage Loan
- Low down payment
- Loan may be assumable
- Borrowers may use gift for down payment and closing cost
- Easy qualifying
Disadvantages of the FHA Mortgage Loan
- All signers on the loan must occupy the property
- Lower loan limits than some conventional loans
- Required MIP for 5 years on 30 year loans
- Credit is required
- Conservative loan packages
FHA Refinance, 203K and Streamline Loans
In addition to FHA mortgage loans FHA has many other type of loans:
- FHA refinance: cash out loans are available and normally used for a variety of things, such as college education. The borrower may refinance the property for 85% of the appraised value.
- FHA 203K loans are also available for home improvements.
- FHA streamline financing is available with little paperwork and may not require an appraisal. There is no credit underwriting, credit check, face to face application, debt ratios, and appraisal or income verifications.
FHA mortgage loans do have some disadvantages, but for the first time home buyer it has many benefits. To understand fully all the programs talked about in this article it is advisable to visit FHA.com/mortgages.