Top Ten Facts About FHA Loans

Essentially, a FHA loan is a loan insured by the Federal Housing Administration. In the event the buyer defaults on the loan, the FHA will reimburse the lender of any expenses. This allows lenders to grant larger loans with fewer restrictions. As a result, the FHA is the largest insurer of mortgages in the world. The program originated during the Great Depression of the 1930’s when the rate of foreclosures skyrocketed and was intended to provide lenders enough confidence to continue to provide loans to individuals wanting to purchase a home.¬†Since it was established in 1934, the FHA has insured more than 25 million mortgages.


FHA loans requires a small monthly insurance premium for down payments less than 20%.

In order to protect lenders against potential defaults on home mortgages, the FHA requires borrowers to purchase mortgage insurance if the initial down payment is less than 20% of the home value. There are two mortgage insurance premiums which must be paid. The first is the upfront premium, which is 2.25% of the mortgage amount, which gets rolled into the loan. The second is a monthly premium which is roughly equal to .5% of the original value of the mortgage divided by twelve. As an example on a $100,000 home, the upfront costs are about $2171.25 and the monthly cost is about $45.21.


There aren’t any income limits on FHA loans.

No matter how much money you make, you are eligible to apply for a FHA loan. There are, however, spending limits on FHA loans depending on the area. With that said, in most areas the FHA allows a large enough mortgage to purchase a very nice home. As an example. the spending limit in Los Angeles County in 2014 is $625,500.00.


Competitive fixed interest rates.

The interest rates on FHA loans are comparable to those of conventional loans and the prime rate. On occasion, interest rates on FHA loans can actually be better than conventional loans, making them a very appealing option to all home buyers.


The FHA offers special home renovation programs.

One of the special loan programs the FHA offers is called a 203(k) loan. What makes this loan program so unique is the loan amount isn’t based on the current value of the home, but rather on the projected value of the home after the repairs have been completed. This allows people to purchase affordable homes that just need a little bit of love to make them into a nice residence.


You don’t need to have excellent credit to qualify for a FHA loan.

Although it is always a positive to have perfect credit, it isn’t necessary to qualify for a FHA loan. The typical credit requirements for FHA loans is to have less than two late bills over the course of the previous two years, and have a minimum credit score of 620. This can usually be accomplished by maintaining a good payment record and paying off any outstanding bills. Leeway can even be approved for borrowers who have filed for bankruptcy.



You don’t have to be a first time home buyer to quality for a FHA loan.

The original intent of the FHA was to allow people with little money to put down to purchase a home. After the housing bust in 2008, many homeowners were faced with a drastic reduction in equity and as a result don’t have a lot of money to put down after the sale of their current home. FHA loans provide a great solution for individuals in that sort of situation as well.


FHA loans allow for a variety of different housing options.

The FHA allows borrowers to purchase a variety of different residence types. This includes 1-4 unit duplexes, approved condominiums, townhomes, manufactured homes, and traditional houses. By allowing this flexibility the FHA provides the ability of borrowers to purchase a home to best suites their needs.


There is no prepayment penalty on FHA loans.

It is completely up to the borrower if they wish to pay off their loan faster than required. This is a great way for a borrower to establish additional equity when they have some extra cash sitting around.


FHA loans provide flexibility in covering down payment and closing costs.

To come up with the money for a down payment FHA loans allow borrowers to use gifts and allow the seller to pay up to 6% of the loan amount toward a borrower’s closing costs. Of course it is up to the seller if they want to cover the closing costs, but it is a possible negotiation point.


Low down payment.

One of the biggest benefits of FHA loans for first time home buyers is it allows people to purchase a home with a down payment as little as 3.5% of the home value. Most traditional loans require down payments in the range of 10% – 20%, which is a lot of money upfront for people who don’t currently own a house.


Featured Image: Flickr by Jan Tik

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