An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930s; to provide mortgage lenders with adequate insurance; and to help stimulate the housing market by making loans accessible and affordable. Nowadays, FHA loans are very popular, especially with first-time home buyers.
Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. An FHA down payment of 3.5 percent is required. Borrowers who cannot afford a traditional down payment of 20 percent or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario. Another advantage of an FHA loan is that it can be assumable, which means if you want to sell your home, the buyer can “assume” the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.
You knew there had to be a catch, and here it is: Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront – or, it can be financed into the mortgage – and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.
Upfront mortgage insurance premium (MIP) — Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
Annual MIP (charged monthly) —Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower's loan-to-value (LTV) ratio, loan size, and length of loan. There are different Annual MIP values for loans with a term greater than 15 years and loans with a term of less than or equal to 15 years.Loans with a term of greater than 15 Years and Loan amount < or =$625,000.
Example (for LTV less than 95 percent on a 30 year loan): $300,000 loan x 1.30% = $3,900. Then, divide $3,900 by 12 months = $325. Your monthly premium is $325 per month. The Mortgage Insurance will be in your payments for the entire loan term if your LTV is >90%. If your LTV is = or < 90% , the Mortgage Premium will be for the mortgage term or 11 years, whichever occurs first.
Single family home mortgages with amortization terms of 15 years or less, and a loan-to-value (LTV) ratio of 78 percent or less, remain exempt from the annual MIP. The duration of your annual MIP will depend on the amortization term and LTV ratio on your loan origination date. Please refer to this chart for more information:
|≥ 15 yrs||≥ 78||No annual MIP|
|≥ 15 yrs||< 78-90.00||Cancelled at 78% LTV|
|≥ 15 yrs||< 90.00||Cancelled at 78% LTV|
|< 15 yrs||≥ 78||5 years|
|< 15 yrs||< 78-90.00||Cancelled at 78% LTV & 5 yrs|
|< 15 yrs||< 90.00||Cancelled at 78% LTV & 5 yrs|
|≥ 15 yrs||≥ 78||11 years|
|≥ 15 yrs||< 78-90.00||11 years|
|≥ 15 yrs||< 90.00||Loan Term|
|< 15 yrs||≥ 78||11 years|
|< 15 yrs||< 78-90.00||11 years|
|< 15 yrs||< 90.00||Loan Term|
Property needs to meet certain standards: Also, an FHA loan requires that a property meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
Keep current on the premium costs for FHA loans by visiting the U.S. Department of Housing and Urban Development (HUD).
You can shop for mortgage quotes for an FHA loan using one of Troy Elston's experienced lenders and loan officers. Just contact Troy and he will put you in touch with the most experienced and knowledgable loan officers in the industry.
check out FHA's frequently asked questions page.
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