Basic FHA Facts
Below are 8 basic facts about FHA loans. Some you might know and others might surprise you. Take a look.
ONE: FHA loans require expensive mortgage insurance.
With a conventional loan and 20 percent down, you do not have to pay for pricey mortgage insurance. With an FHA loan, you do and if you put down less than 10 percent, it stays on your loan for the life of the loan. Gone are the days where it would drop off when you reached 20 percent equity. The only way to get it off is to refinance the loan.
Put down more than 10 percent and things are better, but just slightly. Your mortgage insurance would drop off automatically after 11 years. You are very likely to have reached 20 percent equity far before that point however.
TWO: They have very lenient requirements.
The reason that FHA loans are so popular is the fact that the are so easy to qualify for. In order to qualify, you merely have to have a credit score higher than 500 and 3.5 percent to put down. On the average mortgage of 200,000 dollars, that is just 7000 dollars.
Do keep in mind though that while FHA is lenient, lenders might not be so forgiving. Most lenders will have requirements that are far higher than 500 with a score higher than 580 being more realistic.
THREE: You can get a reverse loan.
Many older people are unaware that you can actually get an FHA reverse mortgage. If you are over 62, this may be an option for you if you have significant equity in your home.
The benefit to a reverse mortgage is that it can allow retired persons to tap into the equity in their home as a source of cash flow. That can allow them to stay in their home instead of potentially being forced to sell it.
FOUR: Lenders set their own terms.
The FHA is just guaranteeing the loan, the actually terms and rates will vary from lender to lender. These terms and rates are not set in stone from the FHA.
This means that potential home owners need to shop their mortgage to different lenders. It also means that while you qualify for an FHA loan through the government guidelines, not all lenders will approve you.
FIVE: You can get free assistance.
If you are having difficulty making the payment on your FHA loan, you can get free advice and counseling.
Contact the HUD office and ask for a foreclosure avoidance counselor. You can then meet with your counselor and get free advice. They will be able to help you sort through your options and hopefully keep your home.
SIX: You pay mortgage insurance in two ways.
The catch to an FHA loan is the requirement for very costly mortgage insurance. You will pay this insurance in two ways.
First, you pay an up front fee when you take out the loan. It is calculated as 1.75 percent of the loan amount. This means that on an average 200,000 dollar loan, the up front cost is 3500 dollars.
Next, you pay an annual premium that will vary based on how much you put down on the loan. Put down the minimum of 3.5 percent and you will pay .85 percent each year. If your down payment was over 5 percent, that rate drops to .8 percent. It is a very costly expense with the annual insurance cost on a 300,000 loan coming out to over 2500 dollars a year.
On the bright side, annual insurance costs are based on the outstanding balance, not the original loan balance. That means that it will continue to drop over the years.
SEVEN: You can borrow money for repairs.
If the house you want to buy needs repairs, you may be able to get a 203K FHA loan. This loan will allow you to borrow additional funds that you can use towards the homes needed repairs. The loan will be based on the expected value of your home after the needed repairs are made.
EIGHT: Closing costs can be paid for by others.
An FHA loan allows closing costs to be paid by your seller, builder or lender. This can make it much easier to get into a home since closing costs like title fees, appraisals and other charges will tack on thousands of dollars to the up front costs of a mortgage.