What is a Federal Housing Administration (FHA) loan?

What is a FHA loan?

Sometimes the term Federal Housing Administration (FHA) loans is misunderstood since they are not loans at all. They insure loans with the intent that lenders can offer mortgage assistance to people who:

- Have poor credit

- Have a low payment

- Have gone bankrupt

- Have been foreclosed

Virtually, the federal government insures loans for FHA-approved lenders in order to reduce the risk of loss in case they land to borrowers who fail to pay the mortgage. The FHA program has been brought into being since the 1930s in order to encourage the housing market by making the loans affordable and accessible. FHA loans have helped the elderly, military, handicapped, or lower-income families. Actually, anyone can get an FHA loan.

What are the advantages of FHA loans?

An FHA loan represents the easiest type of real estate mortgage loan because it doesn’t require a high payment and you can have a good credit. Additionally, due to the fact that FHA insures you mortgage, lenders tend more to offer loans. One more advantage of FHA loans lies in their assumability, i.e. if you want to sell your home, the buyer assumes your loan. FHA loans are usually used for the purchase of a home or for a refinance.



How to get an FHA loan?

Zillow Mortgage Marketplace is the perfect place where you can anonymously shop for mortgage rates for and FHA loan. All you have to do is to submit a request and you will get custom quotes instantly from a marketplace filled with a great number of lenders. The process is free of charge, easy and you are anonymous.




What is necessary to qualify for an FHA loan?

Must have an appropriate employment history or worked at the same place for the last two years.
Must have in-force Social Security number, legal USA residency, and be of legal age.
The minimum down payment is of 3.5% for a home or 10% down in case your credit score is between 500 and 579. The money should be gifted by a member of the family (conventional financing prohibits gifting).
A property appraisal from an FHA-approved appraiser is necessary.
The monthly debt (credit cards, mortgage, student loans, auto, etc.) should not exceed 43% of your monthly revenue.
The minimum credit score should be of 500. The down payment for a credit score of 580 and above is of 3.5% and for a credit score of 500-579 it is of 10%. FHA-qualified lenders will determine the applicant’s credit worthiness on a case-by-case basis.
Must be out of bankruptcy for two years, with a good credit.
Must be out of foreclosure for three years, with a good credit.
What are the disadvantages of an FHA mortgage?

What you should know about this kind of mortgage is that an FHA loan does not set any strict standards of a conventional loan, thus it requires two types of mortgage insurance premiums: one that is paid in advance (or it can be financed into the mortgage); and the other is a monthly payment. Moreover, FHA loans demand that the house meets particular conditions and must be appraised by an FHA-approved appraiser.

Upfront mortgage insurance premium (MIP) – it is an upfront monthly payment. It means that the borrower will pay a premium of 1.00% for the home loan, without regard to the credit score. For example: $300,000 loan x 1.00% = $3,000. This amount of money can be either rolled into the mortgage or paid in advance at closing as part of the settlement charges.
Annual MIP (charged monthly) – it is a monthly charge that will be included in your mortgage payment. It depends on borrower’s loan-to-value (LTV) ratio and loan length. There are two types of Annual MIP values: 0.85% and 0.90%. In case the LTV is less than or equal to 95% then the borrower has to pay 0.50%. If the LTV is above 95%, annual premiums represent 0.90%. For example: $300,000 loan x 0.90 = $2,700. After that divide $2,700 by 12 months = $225. Thus, your monthly premium is $225. In order to understand for how long you will have to pay mortgage insurance you should know that:
For mortgages of more than 15 years, the MIP will stop after 5 years or when the remaining balance on the loan represents 78% of the property value.
For mortgages of 15 years and less as well as with LTV ratios of 90% and higher, the MIP will drop off when the LTV ratio gets 78% — regardless the time the borrower has paid the MIP.
For mortgages of 15 years and less as well as with LTV ratios of 89.99% and lower, the borrower will not be charged MIP.
Property should meet particular standards – an FHA loan requires that a property meets some standards at appraisal. It the home you want to purchase does not meet these requirements and the seller doesn’t agree to the necessary repairs, the only one option is to pay the repairs at closing.
For more information on premium costs for FHA loans, visit the U.S. Department of Housing and Urban Development (HUD).