What Are FHA Home Loans
FHA home loans have been around since 1930s. FHA home loans is a federal government plan, created with the intent of assisting home loan borrowers to get home loans at reasonable terms.
The FHA home loans have been somewhat more targeted to the middle income bracket of borrowers and have helped them secure a home loan in spite of the lack of a stellar credit rating and the ability to make a large down payment on the home loan.
The FHA does not give out home loans on its own. It insures the loans that are given out by its HUD approved lenders across the length of the country. FHA home loans are available from the FHA approved lenders to all those home loan borrowers who meet the qualification criteria.
By saying that the FHA only ensures the loan given out by its approved lenders it means that the FHA places are guaranteed on the home loan to repay the mortgage lender the entire amount of the mortgage loan in case the borrower happens to default.
For the purpose of ensuring a home loan the FHA charges an upfront insurance payment as well as a monthly insurance payment (MI). Currently these are chargeable at the rate of 1% and .5% to .55% respectively.
In this manner the FHA provides affordable financing is to homeowners across the nation and thereby stimulates housing markets and community developments.
The demand for the FHA home loans decreased substantially in the 1990s as the prices of houses increased while the borrowing limit on the FHA home loan remained rather modest. Given the boom in the housing market many mortgage lenders developed many more enticing and attractive home loan products which became more appealing to the borrowers than the FHA home loans. Any mortgage lenders use in the qualification criteria and began offering hundred percent financing qualified buyers.
In the recent times the popularity of the FHA home loans has grown again since the slump in the housing market. Since the sub-prime mortgage market has almost disappeared FHA home loans have again found the appeal to people who have less than stellar credit and are unable to make large down payments.
FHA home loan also have an appeal to the average income group as the requirements and paperwork are done according to the FHA guidelines. This offers more security to the borrowers. Lenders can also find themselves more inclined to deal with the FHA because there lending is guaranteed by the FHA and they are insured against losses.
FHA home loans are assumable so selling the home in the future could be a lot less hassle for the seller, the buyer and the lender.
The borrowing limits that were applicable on an FHA loan at the end of the year 2010 were equal to those applicable on Fannie Mae or Freddie Mac loan. For the single family house this limit range from $271,050 to $729,750 for those 76 counties which were considered to be high priced real estate areas.
Loan limits on a 2 to 4 family house are even higher. On a reverse mortgage or what is also known as HECM the maximum amount that could be borrowed was raised to $625,500.
Understanding the FHA Insurance Costs
All the FHA mortgage loans are associated with a insurance cost that is peculiar only to FHA loans.
The FHA typically takes on a higher risk by accepting borrowers with a lower credit score and a lower down payment. This means that borrowers who are considered to be a high risk by other conventional lenders can potentially qualify for an FHA home loan.
Secondly, the amount of down payment required in a conventional home loan is 20%. If the borrower is paying anything less than 20% and he is almost always required to purchase Private Mortgage Insurance.
However, an FHA home loan allows a borrower to make a down payment as less as 3.5% to 10%.
By charging a much lower down payment than a conventional loan the FHA is again undertaking a larger risk because it is usually believed that people with a lesser investment in the property will be more likely to abandon the loan when hit by a hardship.
Therefore, the FHA passes on some of this risk to its borrowers by means of charging an insurance payment. FHA is an institution that is self sustained and does not burden the taxpayer within the defaults that it faces within its borrowers.
The FHA charges insurance payment on two different counts. First, an upfront mortgage premium at the time of closing. This is known as the upfront mortgage insurance payment. The borrower then continues to pay insurance premiums at a fixed annual rate which are payable on a monthly basis.
Effective for loans on or after October 4th, 2010, for FHA regular purchases and refinance products, the Upfront Mortgage Insurance Premium is 1.00%, which is a decrease from 1.5%
The Monthly Insurance Premium on loans with less than 5% down payment increases from .55% to 1.55%/annum.
Is The FHA Insurance A Disadvantage?
The fact of the matter is that the upfront mortgage premium is almost always rolled into the original cost of the loan. So at the time of the closing of the loan the borrower does not have to pay anything extra. So in all fairness, the upfront mortgage premiums payment will not make an FHA loan more costly to the borrower.
The monthly insurance payments are calculated on the loan amount excluding the upfront mortgage insurance premium.
For example on an FHA flown amount of $200,000 for a monthly insurance premium rate of .5% the yearly premium will be $1000.
When this is divided into 12 monthly payments the amount comes to $83.33. This amount will be added to your monthly mortgage amount.
Whether or not this is a disadvantage for you will depend on several things :
- Are you able to qualify for a conventional mortgage through a private mortgage lender? If not, FHA might be your only option because it is less strict with credit rating guidelines and downpayment requirements.
- If you are making less than 20% downpayment, how does the private mortgage insurance compare to the FHA insurance payments. Is it more costly?
- Are you going to save money on the FHA home loan, despite the insurance payment, due to a lower interest rate on the loan as compared to a private home loan lender?
Answering some of these questions will make a lot more clearer whether the FHA insurance payment are indeed a dissuading factor when it comes to choosing the FHA to fund your home buying.
How To Get an FHA Mortgage
As mentioned before the FHA does not provide home loans directly but only ensures the home loans. In order to obtain an FHA home loan you first needs to find an FHA approved home loan lender.
The FHA has a list of lenders that it has approved across the length and breadth of the country. These lenders have to ability to process an application for an FHA home loan. If the borrower meets the FHA guidelines, these lenders can approve an FHA loan for the borrower.
However, it should be noted that even though the mortgage lender may be approved by the FHA they can set up their own rates and terms to the borrowers.
Different FHA home loan lenders may have different closing costs and terms and conditions. For this reason it is important to shop around with more than one FHA mortgage lender to find the best option for your FHA approved home loan.
Eligibility Requirements Of An FHA Home Loan
Requirements for an FHA home loan are usually less stringent and strict than a conventional home loan, at least in the current housing market scenario.
Credit Score Requirement
The FHA home loan eligibility criteria does not require the person to have the best credit score possible in order to qualify. More than the credit score of a person than approval process for an FHA home loan is dependent upon the proof of ability to meet future mortgage monthly obligations by the borrower.
A person with a medium credit score, who could not qualify for a conventional mortgage in the current market circumstances, may find that he is alleged to for an FHA home loan. It is possible to work with an FHA mortgage lender with a credit score that is 580 to 620. It may be even possible work with an FHA mortgage lender with lower credit ratings or when a person does not have a credit rating at all.
Income Proof Requirement
As mentioned before, the FHA is tolerant of less than stellar credit scores. The credit scores that might disqualify your application with conforming loans can still be acceptable to FHA lenders.
However, what is used as a compensating factor for a sub standard credit rating is the income proof as well as proof of other savings and assets that is convincing enough to warranty the approval of the FHA home loan. Even if the FHA guidelines are not so concerned with the credit score of a borrower, they are concerned with the proper documentation of the sources of income to prove that the borrower is in a position to make the payments on the mortgage in the future.
Requirement of the Loan Amount
There was a time when the limits set on FHA home loans was so low that many borrowers found that it was insufficient to meet the housing costs in a lot of residential areas. However, since then the limits have been raised to be made equivalent of conforming loans from Fannie May.
When choosing an FHA home loan is the borrowing limit set by your particular state and county location. Different countries have different borrowing limits set by the FHA depending upon whether the area has been classified as a high cost, low cost or a median cost. You can find the limit in your area by contacting your FHA mortgage lender by visiting the website of the Department of Housing and Development. If the cost of the home meets the limits in your area, then you qualify for an FHA home loan on this point at least.
Insurance Requirements for FHA
One more requirements of an FHA home loan is the payment of insurance premiums. Getting approved for an FHA, requires an affront mortgage premium payment of 1% and a monthly premium payment that ranges from .5% to .55% chargeable on an annual basis but payable monthly.
All FHA borrowers are supposed to pay this cost. This is one way in which the FHA passes on the risk of their lending to the borrowers themselves. Since the FHA insures the loans that FHA lenders give, the lenders have a guarantee that the FHA will pay them for their losses in case the borrower defaults on the loan. The insurance payments give overall benefits since they cover FHA costs for borrower defaults and allows the lenders to consider the borrowers with low down payment and less than perfect credit for a home loan.
Since the update made on the down payment requirements of an FHA home loan in 2009, the borrower needs to make a minimum down payment of 3.5% only. This down payment amount can increase to 10% based on other factors such as the credit rating and credit history of the borrower.
This makes the FHA home loan down payment requirements different from a conventional and can make home loan which can require anything up to 20% of the loan value as down payment in order to get the best interest rates and to avoid the private mortgage insurance.
FHA Home Appraisal Guidelines
An FHA home loan requires that the property under question should be appraised and meets certain requirements in terms of its state of health. Many consumers have mistaken this to mean that the FHA protects them from defects in the property that they purchased.
This is not true. The fact is that the FHA does not guarantee the value or condition of the home that the consumer buys. FHA appraisals of the property are meant to protect the FHA themselves and other homebuyers are required to protect their interests by ordering a separate and individual home inspection.