Crucial facts about FHA loans

What is an FHA loan?

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An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans must pay for mortgage insurance, which protects the lender from a loss should the borrower defaults on the loan. Because of the mortgage insurance, lenders can offer FHA loans at attractive (lower) interest rates with less stringent and more flexible qualification requirements to borrowers.

Here are some facts about FHA loans.

Credit does not have to be perfect!
 The minimum credit scores for FHA loans depend on the type of loan a borrower needs.  A credit score of 580 or higher can get a borrower a mortgage with a down payment as low as 3.5 percent.  With credit scores of 500-579, you will need down payments of at least 10 percent. Those with credit scores under 500 generally are not eligible for FHA loans. However, FHA will make allowances under certain circumstances for applicants who have what it calls "nontraditional credit history or insufficient credit" if they meet requirements.  Check with your FHA lender or an FHA loan specialist to see if you are qualified with a score under 500.

Down payment of 3.5 percent
For most borrowers, FHA requires a down payment of 3.5 % of the home purchase price. That's a huge attraction, especially for first time home buyers. In late 2014, Fannie Mae and Freddie Mac reduced minimum down payments to 3 percent from 10 percent, but such loans have limited availability.

FHA borrowers can use their own savings, a gift from a family member, or a grant from a state or local government down-payment assistance program to make their down payment.

Closing costs may be covered
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 incentive for the borrower to buy a new home. Resellers do the same as well to attract buyers to the sale of their home. (Ask your realtor to negotiate some or all of the closing costs in your purchase and sales agreement).

Lenders typically charge a higher interest rate on the loan if they agree to pay closing costs. Borrowers can compare loan estimates from competing lenders to figure out which option makes the most sense.

The lender must be FHA-approved
Because FHA is not a lender, but rather an insurer, borrowers need to get their loan through an FHA-approved lender (as opposed to directly from the FHA). Not all FHA-approved lenders offer the same interest rate and costs savings on the same FHA loan.

Costs, services, and underwriting standards will vary among lenders or mortgage brokers, so it's important for borrowers to shop around.

Two-part mortgage insurance
There are two mortgage insurance premiums that 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. The upfront premium can be financed as part of the loan amount.

The second is called the annual premium and is paid monthly. It varies based on the length of the loan, the loan amount, and the initial loan-to-value ratio, or LTV. The following premiums are for loans of $625,500 or less.

Annual premiums for FHA loans
The 30-year loan, down payment of less than 5 percent: 0.85 percent
The 30-year loan, down payment of 5 percent or more: 0.80 percent
The 15-year loan, down payment of less than 10 percent: 0.70 percent
The 15-year loan, down payment of 10 percent or more: 0.45 percent

Cash can be borrowed for needed repairs.
FHA has a special loan product for borrowers. Borrowers who need extra cash can finance up to $35,000 for nonstructural repairs for items such as cabinets, fixtures, and painting. This loan is called a 203(k) loan and is not based on the current appraised value of the home. It is based on the repair cost to the home.  

Financial hardship relief allowed
FHA insurance isn't supposed to be an easy out for borrowers who are unhappy about their mortgage payments. It is a loan service that offers some relief to borrowers who have an FHA-insured loan, who have suffered a serious financial hardship or are struggling to make their mortgage payments. Such relief might be in the form of a temporary period of forbearance, a loan modification that lowers the borrower’s interest rate, extend the payback period or a deferral of part of the loan balance at no interest.


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