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The FHA Loan

Written by Posted On Saturday, 16 April 2016 13:04

What is an FHA Loan?

The FHA loan represents a mortgage loan which is insured by the FHA – Federal Housing Administration. FHA loans are particularly popular, even more so with the first-time home buyer, given that there are less strict requirements than conventional loans. With a down payment of a mere 3.5 percent, borrowers can avail of an FHA loan, providing their credit score is 580 or above.

Nevertheless, buyers can still obtain an FHA loan with a lower credit score. However, keep in mind that a lower credit score equates to higher interest on the loan.

The FHA program was initiated as a response to the countless defaults and foreclosure which occurred during the 1930s. Essentially, loans are insured by the federal government for FHA-approved lenders as a way to reduce risk of loss for the lender should a borrower default on mortgage payments.

 

Benefits of FHA Loans

Lesser credit score requirement and low down payment

Typically, the FHA loan is among the easiest mortgage loans for which to qualify by virtue of the low down payment and the less-then-ideal credit that’s required. For maximum financing on an FHA loan, a 3.5 percent down payment is called for.

Borrowers that are unable to afford a down payment of 20 percent, that have a reduced credit score, or are unable to meet approval for private mortgage insurance, ought to consider an FHA loan instead.

A further advantage of the FHA loan is that it may be assumable. This means that should you wish to sell your home, the loan can be “assumed” by the buyer.

For more about FHA loans and how they can be beneficial to your needs (or otherwise) get in touch with Maureen Martin. 

 

Mortgage Insurance Requirement

There is a catch to the FHA loan. Due to the loose restrictions over and above a conventional loan, two forms of mortgage insurance premium are called for: The first is paid upfront in full, or is financed via the mortgage, while the other is paid monthly. What’s more, the house must meet certain preconceived conditions and must undergo appraisal by an appraiser who is FHA-approved.

Upfront mortgage insurance premium (UFMIP) — the UFMIP is a one-time monthly payment premium that is paid upfront or may be rolled within the mortgage. Thus, the borrower pays a 1.75 percent premium of the home loan, irrespective their credit score.

Annual MIP (charged monthly) — the annual MIP is also referred to as an annual premium, which represents a monthly charge that is calculated into the mortgage payment schedule. The mortgage insurance premium amount is a certain percentage of the amount of the loan, and is based on the loan-to-value (LTV) ratio pertaining to the borrower, the length of the loan, and the loan size.

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John Mendoza

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