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FHA LOANS

FHA loans allow you to purchase a home with a low down payment and average credit.  Homebuyers can qualify for this type of loan with a down payment of as little as 3.5% of the purchase price and a credit score of 580 or higher.  This type of loan is popular for first-time homebuyers.

What is an FHA Loan and how does it work?

An FHA (Federal Housing Administration) loan is insured by the Federal Housing Administration and is issued by an FHA-approved lender.  Low-to-moderate income homebuyers that have low credit scores and down payments easily qualify for this type of loan compared to various conventional loans.

FHA-approved lenders carry less risk because the loan is guaranteed by the Federal Housing Administration.  In turn, you pay the FHA for that guarantee through mortgage insurance premiums (MIP). This means that if you default on the loan and go into foreclosure, the FHA will pay a claim to the lender.

This type of loan requires you to pay two types of mortgage insurance premiums, one upfront paid at closing or rolled into the loan, and the other paid on a monthly basis.  These payments are sent to an escrow account created by the U.S. Treasury Department, and are used as mortgage payments in case you default on the loan.

There are specific lending requirements set by the FHA besides the credit score and down payment conditions.  These include:

  • The lender must be FHA-approved.
  • You must have a steady employment history or have the same employer for the past two years.
  • If you’re self-employed, you must show good income history for the past two years.
  • You must be of legal borrowing age in your state and lawfully reside in the United States.
  • You must have a valid Social Security number.
  • The property you are purchasing must be your primary residence and must be owner-occupied.

  • An appraisal from an FHA-approved appraiser, which meets minimum property standards must be obtained.
  • You must be at least three years removed from a foreclosure and must be working towards building a good credit status.
  • If you had a bankruptcy, two years must pass except under special circumstances.

  • You should be free of delinquencies on student loans or income taxes.

My role is to look closely into all the details of your history and loan regulations to uncover all possibilities that will lead you to qualify and benefit from an FHA loan.

Pros and Cons of an FHA Loan

FHA loans are somewhat similar to conventional loans.  Let’s uncover the advantages and disadvantages of this highly beneficial loan type.

Pros

  • Loan relief if you experience financial hardship.  If you have a hard time making monthly payments because of a change in income, increased expenses, or other specific reasons, your monthly payment may be lowered to a more affordable amount to help you avoid foreclosure.
  • FHA loans support homebuyers who have low-to-moderate income.  This type of loan was created to assist you in purchasing your home even if you don’t have significant income or money for a down payment.  It is not designed for high-priced homes, it serves those who have limited resources.
  • Easy credit score and down payment requirements.  If you have a lower credit score and not much money for a down payment, this type of loan is definitely in your favor.  The FHA allows underwriters to be more flexible and consider certain circumstances that might have affected your credit.  Flexibility with the down payment is also offered to help those that might need to obtain the money from a family member or another source.  At 3.5 percent down of the purchase price, it is one of the lowest amongst most loan types.
  • Ability to receive a higher allowance for closing costs, which can be expensive for some homebuyers.  Sellers frequently contribute to these costs, but most loan programs limit their contributions to three percent of the loan amount.  FHA loans allow up to six percent, which is usually enough to cover closing costs entirely.  

Cons

  • Mortgage insurance is definitely one of the biggest drawbacks of FHA loans.  In order to protect the lender, you pay more for mortgage insurance, unlike conventional loans where the borrower puts down 20% and avoids mortgage insurance altogether.  To avoid paying this over the life of the loan, you might consider a future refinance when your credit improves and you reach an 80% loan to value point.
  • Home appraisal has strict minimum property standards.  If you’re looking for a fixer-upper or the home needs repairs, you will have to choose another loan product.  The condition of the home has to meet safety, security, and soundness standards established by HUD (U.S. Department of Housing and Urban Development).  This regulation protects both you and the lender.  
  • Loan Limits for FHA loans tend to be much lower in most areas.  The loan limits are updated on an annual basis and are influenced by conventional limits set by Fannie Mae and Freddie Mac.  This type of loan makes sense in lower-cost areas.
  • Higher interest rates determined by your credit score are usually seen in FHA loans.  The APR on this type of loan will always be higher than a conventional loan because of the upfront private mortgage insurance.

When comparing FHA loans to conventional loans one is not better than the other.  As your mortgage specialist, We will help you compare the advantages and disadvantages of each.  Every individual has different needs and circumstances. Your mortgage should be tailored-made for your specific situation, We will guide you in choosing the best option.