The trick with Federal Housing Administration (FHA) financing is that it’s a mortgage insured by the federal government. The way the FHA manages to ensure the loan is that they require the borrower to pay for mortgage insurance. The mortgage insurance protects the lender in case if the borrower defaults on the loan.
FHA mortgages must be obtained from FHA-approved lenders. The FHA has standards that have to be met before the FHA is willing to insure the mortgages.
Because the FHA is behind the loan and the risk to the lender is less, interest rates can be very favorable and less down payment may be required. Because the lender is protected by the insurance, the lender is less cautious about making loans to riskier customers and those with lower credit ratings. For many people, the FHA loan offers the only way they can obtain a mortgage in today’s market. Many first-time home buyers take advantage of FHA loans.
To get a mortgage with a down payment as low as 3.5%, the borrower needs a FICO credit score of at least 580. Those with credit scores of 500 to 579 must make down payments of at least 10%. People with credit scores below 500 are generally ineligible for FHA loans except for special circumstances. The low 3.5% down payment floor is a major attraction for many home buyers. Some special minimum down payments of as low as 3% are also sometimes available.
FHA borrowers pay for their down payments out of their own savings. However, gifts from family members can also be used. Grants from state or local governments down-payment assistance programs are also sometimes available. Closing costs can also be covered by lenders, builders or lenders as an inducement to purchase.
The borrower can use a relative as a non-resident co-borrower to help support qualification for the loan using blended debt-to-income ratios that equally blend the borrower’s and non-occupant co-borrower’s income and monthly payments to qualify for the loan.
Because the government is involved, lenders do find some additional paperwork involved. The appraiser has the additional duty to evaluate and report any health or safety hazards that could affect the insurance. They can require that concerns be repaired before the loan is closed.
The FHA mortgage insurance consists of two payments. The “upfront premium” is paid as part of the down payment. It is 1.75% of the loan amount (a $100,000 loan would cost $1,750 upfront). The annual premium (paid monthly) vary by the size of the down payment and the length of the mortgage.
- If you take a 15-year mortgage with a down payment of less than 10%, the insurance would cost .7% annually. On a $100,000 mortgage, this would mean $7,000 per year or $583 monthly added to your mortgage payment.
- On a 15 year mortgage with a down payment larger than 10%, the insurance may cost only .45% or $375 monthly.
On longer mortgages, risks are greater and the insurance premiums are slightly higher.
- On a 30 year $100,000 mortgage with very low down payments (less than 5%) the annual insurance premium would be $8,500 or $708 per month.
- If the 30 year $100,000 mortgage were started with a down payment of 5% or more, the annual premium would be at $667 per month.
In addition, for those with credit scores above 639, the FHA supports a Housing and Urban Development (HUD) lending program called a 203k. This program guarantees loans to renovate or repair homes.
- The loan must be made by an FHA lender.
- You have to have at least a 3.5% down payment on the home.
- You can have no other FHA-approved loans outstanding.
- The loans can range from $5,000 for minor repairs to sufficient coverage to virtually reconstruct the home.
- The loan is based on the value of the home after the repair or improvement is made.
- The loans are subject to certain basic energy efficiency and structural standards.
Pacific Mortgage Group can help you lock in the most competitive rates. If you are ready to start looking for a home loan or home quotes give us a call and we can help you every step of the way. Please contact us to learn more.