FHA loans

An FHA loan offers more flexible credit qualifying guidelines than other loan types. This is due to the fact that the Federal Housing Administration(FHA) insures this type of loan. FHA does not lend the money, they guarantee the loan. Due to the fact that the government is backing the loan, a lender is able to offer a competitive interest rate. A low interest rate can really help save the borrower a lot of money.

The requirements necessary for obtaining an FHA loan are relatively simple. Joe does not need to be worried about having the perfect credit score to get an FHA loan. Currently, FHA guidelines state you only need a 580 credit score to qualify for an FHA loan, where a conventional loan will require at least 620. However, this number may vary from lender to lender.

Another advantage to an FHA loan is that only a 3.5% down payment is required for approval. This number is lot smaller than other loan types which will ask for anywhere from 5-20% of the loan. In addition, the down payment does not necessarily have to come from the borrower’s pocket. The money is allowed to come from a family member, employer or charitable organization as a gift.

A big downside to the FHA loan is the Mortgage Insurance Premium (MIP). It is collected at loan closing in addition to an annual premium collected in monthly installments. In most cases MIP stays on for the life of the loan unless you put 10% down, then it’s a minimum of 11 years. With FHA, the borrower ends up paying more over the life of loan.

An FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration (FHA). Designed for low-to-moderate income borrowers, FHA loans require lower minimum down payments and credit scores than many conventional loans.

As of 2019, you can borrow up to 96.5% of the value of a home with an FHA loan (meaning you’ll need to make a down payment of only 3.5%). You’ll need a credit score of at least 580 to qualify. If your credit score falls between 500 and 579, you can still get an FHA loan provided you can make a 10% down payment. With FHA loans, your down payment can come from savings, a financial gift from a family member or a grant for down-payment assistance.

How FHA Loans Work
It’s important to note that the Federal Housing Administration doesn’t actually lend you money for a mortgage. Instead, you get a loan from an FHA-approved lender, like a bank, and the FHA guarantees the loan. You pay for that guarantee through mortgage insurance premium payments to the FHA. Your lender bears less risk because the FHA will pay a claim to the lender if you default on the loan.

An FHA loan requires that you pay two types of mortgage insurance premiums – an Upfront Mortgage Insurance Premium (UFMIP) and an Annual MIP (charged monthly). The Upfront MIP is equal to 1.75% of the base loan amount (as of 2018). You pay this at the time of closing, or it can be rolled into the loan. If you’re issued a home loan for $350,000, for example, you’ll pay an UFMIP of 1.75% x $350,000 = $6,125. The payments are deposited into an escrow account set up by the U.S. Treasury Department, and the funds are used to make mortgage payments in case you default on the loan.

Despite the name, you make Annual MIP payments every month. The payments range from 0.45% to 1.05% of the base loan amount, depending on the loan amount, length of the loan, and the original loan-to-value ratio (LTV). The typical MIP cost is usually 0.85% of the loan amount. If you have a $350,000 loan, for example, you will make annual MIP payments of 0.85% x $350,000 = $2,975, or $247.92 monthly. This is paid in addition to the cost of UFMIP.

Lenders Consider Work History
Your lender will evaluate your qualifications, too, as it would any mortgage applicant’s. But Instead of using your credit report, a lender may look at your work history for the past two years as well as other payment-history records, such as utility and rent payments. You can qualify for an FHA loan if you’ve gone through bankruptcy or foreclosure, provided you’ve re-established good credit. In general, the lower your credit score and down payment, the higher the interest rate you’ll pay on the mortgage.

Keep in mind, when you buy a home, you may be responsible for certain out-of-pocket expenses such as loan origination fees, attorney fees and appraisal costs. One of the advantages of an FHA mortgage is that the seller, home builder or lender can pay some of these closing costs on your behalf. If the seller is having a hard time finding a buyer, they might just offer to help you out at closing time as a deal sweetener.

Types of FHA Loans
Home Equity Conversion Mortgage (HECM) program – a reverse mortgage program that helps seniors aged 62 and older convert the equity in their homes to cash while retaining title to the home. You choose how to withdraw the funds, either as a fixed monthly amount or a line of credit (or a combination of both).

FHA 203k improvement loan, which factors in the cost of certain repairs and renovations into the loan. This one loan allows you to borrow money for both home purchase and home improvements, which can make a big difference if you don’t have a lot of cash on hand after making a down payment.

FHA’s Energy Efficient Mortgage program is a similar concept, but it’s aimed at upgrades that can lower your utility bills, such as new insulation or the installation of new solar or wind energy systems. The idea is that energy-efficient homes have lower operating costs, which lower bills and make more income available for mortgage payments.

Section 245 (a) loan – a program for borrowers who expect their incomes to increase. Under the Section 245(a) program, the Graduated Payment Mortgage starts with lower initial monthly payments that gradually increase over time, and the Growing Equity Mortgage has scheduled increases in monthly principal payments that result in shorter loan terms.

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