Important Facts About FHA MortgagesSeptember 11, 2017
If you have poor credit, an FHA mortgage could be the best option for you. These loans are backed by the government and insured under the Federal Housing Administration. If a lender has been approved by the FHA to issue insured FHA mortgages, those lenders are at less personal risk if the mortgage defaults. This type of mortgage was first created as a way to make mortgages accessible to a larger group of people who otherwise couldn't receive them due to criteria or cost.
FHA loans are appealing because they often have less strict credit prerequisites and more flexible rate terms. This makes them popular amongst those buying their first home. There are downsides to this type of mortgage, however. Fees and interest rates are usually higher, and mortgage insurance premiums are substantially larger than with a conventional home loan. Both fixed and adjustable rate FHA mortgages are available through many financial institutions.
What is an FHA Loan?
When the FHA approves a lender to issue FHA mortgages, they agree to compensate the lender if the borrower defaults on the loan. To cover this compensation, the FHA requires an insurance premium and maintenance fees that are built into the loan.
FHA Mortgage Pros and Cons
Low Down Payments - While most traditional mortgages require down payments of at least 5 percent of the loan amount, FHA mortgages typically only require 3.5 percent. This can certainly make a big difference to first-time home buyers or anyone struggling to come up with a sufficient down payment. Of course, the lower down payment of an FHA loan typically gets made up for with a higher interest rate.
Limited Credit Prerequisites - Borrowers with circumstances that would prevent them from getting a conventional mortgage could still qualify for an FHA mortgage. This includes those with poor credit, a short credit history, those who have been foreclosed upon, and those who have declared bankruptcy.
Loan Assumability - If you decide to sell your home before you've paid it off, the buyer may assume the existing loan without any changes to the terms.
Fewer Options - There are limited FHA loans on the market, so you won't have many choices.
Smaller Loan Values - You might not be eligible to borrow as much as you need with an FHA mortgage.
Greater Costs - Fees and insurance premiums associated with FHA mortgages are higher than they are with conventional mortgages. Not only that, but you have to have a second type of mortgage insurance with an FHA mortgage.
The FHA MIP (Mortgage Insurance Premium)
The MIP is put in place by the FHA to protect their approved lenders in the event of a loan default. If you get an FHA mortgage and put down less than 20 percent, you'll be required to have this insurance. For FHA mortgages, these are the two types of insurance you might have to have:
Annual MIP - This insurance premium is added to each monthly payment and is based on the terms of your loan, the size of the loan, and the loan-to-value ratio on the property.
Upfront MIP - If you're required to pay the upfront MIP, you'll have to pay 1.75 percent of the mortgage value upfront. For instance, if you got an FHA mortgage for $100,000 and had to pay the upfront MIP, you would have to pay $1,750.
Who Qualifies For FHA Mortgages?
There are several criteria you'll have to meet if you want to receive an FHA mortgage, which include:
Appraisal - You must have the property appraised by an appraiser that has been FHA-approved.
Minimum Down Payment - You must make a down payment of at least 3.5 percent.
Steady Employment - You must be able to show a steady work history in the same job or field for at least two years.
Primary Residence - The property must be your primary residence.
FHA Mortgage Credit and Income Requirements
You must have a credit score of at least 500 to apply for an FHA mortgage, and if you're planning to pay the minimum 3.5 percent down payment, you'll need a credit score of at least 580. While there are no income minimums or maximums, you'll typically need the mortgage monthly payment, including all applicable premiums and fees, to be no more than 30 percent of your gross monthly income.
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