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FHA Loans

The percentage of homebuyers using FHA loans is increasing. An FHA loan means the loan is backed by a government insured Federal Housing Administration (FHA) loan. Hence, there is no risk to the lending institution.

 

 

Typically when purchasing a home, a buyer must provide a minimum 5% down payment to obtain a conventional loan. FHA guidelines permit a borrower to purchase a home with as little as 3.5% down and allows gifts from family members to assist with the down payment. Given the tight economy, a higher percentage of home buyers are using FHA loans since a lower amount of money is needed for closing. As a result recently FHA loans have grown from 3% to 25% of the housing loan market.

 

The interest rate on an FHA loan is comparable to a non-FHA conventional mortgage rates. Higher fees on FHA loans significantly increase the cost. FHA loans charge an upfront fee which can be part of the mortgage. This fee is based on the borrowerÅfs credit score and the Loan To Value % and ranges from 1.75% to a maximum of 2.25%. An additional .5% annual fee for insurance costs that must be paid until the loan balance equals 78% of the sales price or the appraised value. On a typical $100,000 mortgage the 1.75% fee would add to the payment less than $10 per month over the life of the loan. The insurance would add approximately $40 per month to the loan payment.

 

To obtain an FHA loan a buyer will have to prove income and provide an appraisal. Under FHA guidelines, any “appraisal issues” that are significant must be fixed. No leaky roofs, mold damage, or costly repairs can go unfixed.

 

The main advantages of FHA over conventional loans is that the credit qualifying criteria for a borrower are not as strict as conventional loan financing and the down payment or equity requirements are less. For many, an FHA loan makes home ownership possible.


Written on 2009-10-13


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