An FHA loan is a mortgage loan insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
The FHA program was created in response to the rash of foreclosures and defaults that happened in the 1930s, to provide mortgage lenders with adequate insurance, and to help stimulate the housing market by making loans accessible and affordable. Nowadays, FHA loans are very popular, especially with first-time home buyers.
What are the Advantages of FHA Loans?
Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. An FHA down payment of 3.5 percent is required. Borrowers who cannot afford a traditional down payment of 20 percent or cant get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario. Another advantage of an FHA loan is that it can be assumable, which means if you want to sell your home, the buyer can assume the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan given enough time has passed since the foreclosure or bankruptcy.
What are the Disadvantages of an FHA Mortgage?
You knew there had to be a catch, and here it is: Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront or, it can be financed into the mortgage and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.
Upfront mortgage insurance premium (MIP) Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
Annual MIP (charged monthly) Called an annual premium, this is actually a monthly charge figured into your mortgage payment. It is based on a borrower’s loan-to-value (LTV) ratio, loan size, and length of loan. There are different Annual MIP values for loans with a term greater than 15 years and loans with a term of less than or equal to 15 years. Loans with a term of greater than 15 Years and loan amount < or =$625,000.
Loans with a term of greater than 15 Years and loan amount < or = $625,000
LTV less than or equal to 95 percent, annual premiums are 1.30%
LTV above 95 percent, annual premiums are 1.35%.
Loans with a term of greater than 15 Years and loan amount >$625,000
LTV less than or equal to 95 percent, annual premiums are 1.50%
LTV above 95 percent, annual premiums are 1.55%
Loans with a term of 15 years or less and loan amount < or =$625,000
LTV less than or equal to 90 percent, annual premiums are .45%
LTV above 90 percent, annual premiums are .70%
Loans with a term of 15 Years or less and loan amount >$625,000
LTV less than or equal to 90 percent, annual premiums are .70%
LTV above 90 percent, annual premiums are .95%
Example (for LTV less than 95 percent on a 30 year loan): $300,000 loan x 1.30% = $3,900. Then, divide $3,900 by 12 months = $325. Your monthly premium is $325 per month. The mortgage insurance will be in your payments for the entire loan term if your LTV is >90%. If your LTV is = or < 90%, the mortgage premium will be for the mortgage term or 11 years, whichever occurs first.
FHA Loan Limits
There are maximum mortgage limits for FHA loans that vary by state and county. In certain counties, you may be able to get financing for a loan size up to $729,750 with a 3.5 percent down payment. Conventional financing for loans that can be bought by Fannie Mae or Freddie Mac are currently at $625,000. In Washtenaw County for example, the FHA loan limit is $271,050 for a single family home.
I hope this gives you a little insight into what an FHA loan is and how it may be the right loan for you. If you have any further questions please do not hesitate to contact me with any questions.