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FHA Loans

What is an FHA loan?

An FHA loan is a loan insured by the Federal Housing Administration (FHA). Most of the FHA programs are designed for first time home buyers and low to moderate-income borrowers. FHA loans have lower down payment requirements and are easier to qualify for than conventional loans. FHA loans cannot exceed the statutory limit, which varies according to the county you live in.

There are many good reasons to obtain an FHA loan including:

  • Your complete down payment and closing costs can be gifted by a family member
  • 3 1/2 percent minimum down payment with the buyer having a minimum of 3 1/2 percent committed in the transaction (can be gifted).
  • Separate approval from PMI companies not required.
  • Minimal assets to close (3 1/2 percent).
  • Non-occupying co-borrowers are o.k. (must be family members).
  • Up to 3 percent sales concessions permitted that can cover discount points, prepaid, escrows and closing costs.
  • More liberal qualifying ratios (31%/43%) that can be exceeded with compensating factors (i.e. larger down payment, reserves, excellent credit, etc.).
  • Reserves not required on one or two family houses.
  • FHA is more lenient on negative credit (620 minimum FICO score)
  • Can provide non-resident aliens with affordable financing.
  • High loan-to-value financing on FHA approved condominiums.
  • High loan-to-value financing on multi-family units (up to four units).
  • FHA counts 85 percent rental income on owner occupied multi-family units.
  • All FHA loans must be full income documentation and owner occupied.
  • Residential Home Funding Corp. is a direct endorsed FHA lender, which allows in house origination, processing, underwriting, and closings.
  • Rates are very competitive at all credit levels.

Lower Rates

An FHA loan has competitive interest rates because the Federal government insures the loans for lenders. Always compare an FHA loan with other loan types.

Easier to Qualify

Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify.

If You Have Less Than Perfect Credit

You don’t have to have perfect credit to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it’s easier for you to qualify for an FHA loan than a conventional loan. A minimum 620 FICO score is required for FHA financing.

More Protection to Keep Your Home

The FHA has been around since 1934 and will continue to be here to protect you. Should you encounter hard times after buying your home, the FHA has many options to help you keep you in your home and avoid foreclosure.

FHA does not give money to people for a home and it does not set the interest rates on mortgages it insures. FHA insures loans for lenders against defaults. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. An FHA-approved lender can help you start the loan application process.

You may use an FHA-insured mortgage to purchase or refinance a new or existing 1-4 family home or a condominium unit.

How does an FHA loan Compare to a Conventional Loan?

Conventional loans usually require a larger down payment. And, if you have less than perfect credit you may not qualify for many conventional loans and find yourself being offered loans with higher interest rates and/or fees than you expected. The best thing to do is compare the cost of the conventional loan to an FHA loan line-by-line. What are the fees on each? What is the interest rate? How much is the mortgage insurance on each? How much is down payment required? For some borrowers, a conventional loan may be less expensive. For many others, it will be more expensive than FHA.

Fixed Rate Loans

Most FHA loans are fixed-rate mortgages (loans). In a fixed rate mortgage, your interest rate stays the same during the whole life of the loan, normally 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your monthly payment will be, and you can plan for it.

Adjustable Rate Loans

Most first-time homebuyers are a little stretched financially, so they want payments as low as possible at the beginning. With FHA’s adjustable rate mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. FHA uses the 1-Year Constant Maturity Treasury Index (1 Yr CMT the most widely used index, to calculate the changes in interest rates. An index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time.

The maximum amount that the interest rate on your loan may increase or decrease in any one year is 1 or 2 percentage points, depending upon the type of ARM you choose. Over the life of the loan, the maximum interest rate change is 5 or 6 percentage points from the initial rate, again depending on the type of ARM you choose. The advantage of an ARM is that you may be able to afford more house; because your initial interest rate will be lower, as will your payment.

Purchase – Rehabilitation Loans

Sometimes you might see a home you’d like to buy, but it needs a lot of work. FHA has a loan for rehabilitating and repairing single-family properties called the SF Rehabilitation Loan program (203k). You can get just one mortgage loan which includes the mortgage and the cost of repairs combined. The mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. The advantage of this loan is that you can buy a home that needs a lot of work, but you still have only one mortgage payment, and you can complete the repairs after buying the home.

Indian Reservations and Other Restricted Lands

A family who purchases a home under this program can apply for financing through an FHA approved lending institution such as a bank, savings, and loan, or a mortgage company. To qualify, the borrower must meet standard FHA credit qualifications. An eligible borrower can receive approximately 96.5% financing. An eligible party can produce a gift for the down payment. Closing cost can be financed; covered by a gift, grant or secondary financing; or paid by the seller without lowering the value.