Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
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What does that mean to you?
As stated in the definition above, FHA is a mortgage type that allows for borrowers with fair to average credit scores obtain a mortgage with a minimal down payment required. As guidelines stand now FHA allows for purchases up to 96.5% of the sales price. This means the typical down payment on a FHA loan is as low as 3.5% of the sales price.
FHA loans require two forms of mortgage insurance, known as UFMIP (up-front mortgage insurance premium) and MIP (mortgage insurance premium). These figures are calculated by a percentage of the loan amount. The up-front mortgage insurance premium has the option of being financed into the loan and the mortgage insurance premium is a monthly premium that is included in your monthly note.
Currently the UFMIP premium being charged to the loan is 1.75% but remember, this is most often financed back into the loan.
The monthly mortgage insurance premium can vary based on the term of the loan and the amount of down payment being paid at the time of closing. Any new FHA mortgage with a down payment of less than 10% requires monthly mortgage insurance payments for the life of the loan. All down payments 10% or more of the sales price requires monthly mortgage insurance payments remain in place for 11 years. This is why it is important to compare the total amount paid over the life of the loan on different loan types to make sure you are getting the best overall deal you can afford for the length of time you plan on owning the property.
Why choose FHA?
Although FHA charges two types of mortgage insurance premiums it does allow for borrowers to purchase homes with a lower down payment and with lower credit scores than what would be required on a Conventional mortgage. FHA also typically has lower interest rates than what Conventional loans offer which helps offset some of the mortgage insurance charges when comparing principal, interest and mortgage insurance payments.
Other financing options provided by FHA include 100% financing for victims displaced by the recent flooding (203h), repair opportunities (203k) and condominium financing (234c).
Benefits of a FHA loan:
- Smaller down payment requirements (as low as 3.5%) for purchases
- Larger seller concessions allowed towards closing than on conventional loans. A seller concession is another term for seller paid closing cost.
- More lenient credit requirements, some lenders will even consider taking credit scores as low as 580 if the other borrower requirements are met.
- Gift funds for the 3.5% down payment are allowed. This has to be documented. Discuss with LA Lending at the time of application to make sure all conditions are met.
- Property types up to 4 units are allowed on FHA purchases. One unit will need to be owner occupied to have the loan considered a primary residence loan.
- Per HUD guidelines FHA mortgages are assumable. This means you may be able to transfer your FHA mortgage to another purchaser once they have been deemed credit worthy by your lender. This does not automatically release you from the liability. Your lender will have additional forms to complete to release you from the liability.
Restrictions on FHA loans:
- Purchases are restricted to only owner occupied borrowers
- Typically only one FHA loan is allowed per borrower. (Exceptions can be made for extenuating circumstances).
- Loan limits apply: (source U.S. Dept of Housing and Urban Development)
|# of Units||Loan limitations in Louisiana|
- The subject property has to meet FHA property requirements. FHA appraisals are conducted by specialty appraisers to ensure the property meets minimum standards determined by FHA. Those include any deficiency that would cause concern for safety and any condition that would affect the structural integrity of the property. The appraiser will need to comment that the property meets FHA guidelines and if it does not, list all concerns and a cost to repair all items within FHA standards. The buyer cannot pay for these repairs. All repairs will need to be made by the seller. This is a very important hurdle when obtaining a FHA loan and it is very important when making repair request to the seller to keep this in mind.
A FHA loan can be a great option for many buyers who otherwise wouldn’t be in the position to purchase. Because of the appraisal requirements it is very important to stay in contact with your mortgage professional during the appraisal inspection period. A good realtor can help you determine if the property meets FHA standards and if not, can help you negotiate the seller make the applicable repairs. See our page featuring recommended professionals to find the right realtor to help you!
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