FHA Loans

An FHA Mortgage requires a minimum down payment of 3.5%. A key requirement of an FHA purchase loan is that the down payment must be made by the buyer. However, the seller can contribute towards some or all of the closing costs and other expenses related to the purchase of the house. Lenders generally have less rigid standards and lower interest rates because their risk is reduced on FHA loans by the requirement for borrowers to purchase Private Mortgage Insurance (PMI) on an FHA mortgage.

The basic eligibility requirements for an FHA loan include:

• Minimum FHA loan credit score of 580. This is for a mortgage with a 3.5 percent down payment. 10 percent down is required for applicants with scores between 500 and 579.
• 5 percent down payment from an acceptable source. Your down payment can come from savings, a loan or a gift, but not from anyone who would directly benefit from the transaction, such as the seller, agent or lender.
• Documentation of income. Lenders are required by law to make sure you can afford your mortgage. You’ll have to supply pay stubs, W-2s and possibly tax returns.

• Clear CAIVRS. CAIVRS is the government’s Credit Alert Interactive Verification Reporting System. It’s a database of people who have defaulted on government loans, owe back taxes or have other federal debt. If you turn up on this list, you must be cleared before you can get an FHA loan.
• Primary residence. This loan cannot be used to purchase a vacation home or second home. However, FHA financing can be used to buy a primary home for a family member.

Most banks and lending institutions offer FHA loans.

Advantages of FHA

• Relaxed Credit Requirements
• Low Down Payments.
• Small Reserve Funds.
• Increased Allowance for Closing Cost Financing.
• Larger Debt to Income Ratios.

Disadvantages of FHA

• Mortgage Insurance.
• Minimum Property Standards.
• Loan limits

Less rigorous lending standards and lower down-payment requirements make FHA loans popular with mortgage borrowers. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.

The most common FHA-insured loan is the 30-year fixed-rate version. The Federal Housing Administration (FHA) offers at least 15 different insured mortgage programs. The most common of them is the traditional 30-year, fixed-rate mortgage.

FHA mortgage insurance protects lenders from losses in the event that borrowers default on their FHA mortgages. Without FHA insurance coverage, few lenders would be willing to fund home loans with minimal down payments to borrowers with low-to-moderate incomes or past credit problems.

FHA mortgage insurance has two components – an upfront mortgage insurance premium (FHA MIP) that can be financed or paid out-of-pocket, and an annual premium based on the loan balance. The annual premium is divided into 12 monthly installments and added to borrowers’ monthly payments. The upfront mortgage insurance is 1.75 percent of the base loan amount, and the annual premiums are shown in these tables:

Typically an FHA loan is one of the easiest types of mortgage loans qualifying because it requires a low down payment and you can have less-than-perfect credit. For FHA loans, down payment of 3.5 percent is required for maximum financing. Borrowers with credit scores as low as 500 can qualify for an FHA loan.

FHA loans have typically been known as loans for first-time homebuyers, filled with extra paperwork and complexity since it’s a government-insured program. But borrowers can use multiple FHA loans for purchasing or refinancing home loan.

The difference in processing time required for FHA loans — as compared to conventional loans — is negligible.

FHA loans also have some nice features that conventional do not. FHA loans are eligible for “streamline refinances” — which is a cheaper and quicker way to refinance your loan in a low-interest rate period. FHA loans are normally priced lower than comparable conventional loans.

Also, FHA loans are assumable loans; this may be a particularly good future resale point if the borrower would have an existing low-interest rate on the home they are selling. That interest rate and mortgage balance can be assumed by a new buyer. Conventional fixed rate loans do not offer this feature.

Conventional loans also have advantages in certain situations. If you make a 20 percent or more down payment for your home, you will not have to pay mortgage insurance to obtain your loan. An FHA loan -– no matter the amount of down payment — requires an upfront premium and also a monthly premium. Even if you put down less than 20 percent, the private mortgage insurance (PMI) charged to obtain the loan could potentially be a lot less than the FHA premiums and even less if your credit is good.

Private mortgage insurance is not only credit-sensitive, but it drops off much more quickly than FHA insurance at lower loan-to-value ratios. Conventional mortgage insurance will fall off automatically when the loan is paid down to 78 percent loan to value (LTV), whereas the FHA premiums will exist throughout the life of the loan if the down payment was less than 10 percent.

Conventional loans can also be used to purchase the investment property and second homes. Conventional loans are also used to do jumbo loans — which are loans that exceed the statutory limits. Currently, the maximum county limit in high-cost areas is $625,500.

• Low down payment required (3.5 percent minimum)
• Can go as low as 500 credit score (620 minimum for conventional)
• Not limited to 43 percent for debt-to-income ratio (qualified mortgage rule applies for conventional loans)
• FHA loans are assumable
• FHA loans are eligible for ”streamline” refinances
• Shorter timeframe following major credit problems (3 years vs. 7 years for foreclosure and 2 years vs. 4 years for bankruptcy)
• FHA loans typically will have a lower base interest rate than a comparable conventional loan
• Non-occupant co-borrower (relative) may be used for qualifying by blending ratios

• Low down payment required (3 percent minimum)
• Mortgage insurance is required for loans exceeding 80 percent loan-to-value (Mortgage insurance is required on all FHA loans regardless of the loan-to-value)
• Conventional mortgage insurance is only monthly or single premium (FHA is upfront and monthly premiums)
• Conventional mortgage insurance will automatically end at 78 percent loan-to-value (FHA will stay for the entire life of the loan)
• Conventional mortgage insurance is credit sensitive (For FHA, one premium fits all)
• Conventional loans can cover much higher loan amounts (FHA over county limits)
• Even though conventional loans may have higher interest rates, their monthly payments may still be lower

There are no minimum or maximum income requirements for FHA home loans Rules do not say that it’s possible to earn too much to qualify for an FHA loan. Regarding minimums, regulations focus more on the borrower’s ability to afford the mortgage loan.

For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP, which is the time at which you will pay for FHA Mortgage Insurance Premiums on your FHA loan. They are as follows: