What are FHA loans?
FHA (Federal Housing Administration) loans are government-backed mortgages issued by FHA approved lenders and guaranteed by the federal government's Department of Housing and Urban development. FHA has been helping Americans purchase homes since 1934. With the help of FHA, Americans who have credit challenges, can afford a house payment but have not been able to save for a down payment or who have had a life event such as a bankruptcy, foreclosure or short-sale have more opportunities to own a home. The FHA loan program can be used to purchase a primary residence, refinance an existing FHA mortgage (streamline refinance) or for a cash-out refinance.
Benefits of the FHA home loan:
3.5% minimum down payment.
The entire down payment can be gifted from a relative, borrowed from an eligible 104K or provided through an approved state or local program.
Sellers can contribute up to 6% of the purchase price toward the buyers closing costs.
Minimum credit score is 580.
Mortgage Insurance is not impacted by your credit score.
Can typically have lower interest rates than a conventional loan.
Allows higher debt to income ratios.
What is the difference between an FHA loan and a conventional loan?
This is a very common question. There are actually some very material differences for you to consider.
1. Mortgage insurance is one of the largest differences.
On an FHA loan you will pay two types of mortgage insurance. Upfront mortgage insurance, which can be financed into your loan, and annual mortgage insurance premiums that are paid monthly with your monthly payment. Upfront Mortgage Insurance is not required on a conventional loan.
You will be required to pay mortgage insurance on an FHA loan longer than on a conventional loan - On an FHA loan, if you put less than 10% down, the mortgage insurance will stay in place for the life of the loan. If you put 10% or more down, the mortgage insurance will automatically drop off in year 11. The mortgage insurance on an FHA loan will never be removed based on the market value of the home. Whereas, on a conventional loan, the mortgage insurance may be removed once your loan balance is 80% of the current market value of the home and, it will automatically be removed once your loan balance is 78% of the original sales price or market value.
Mortgage insurance on an FHA loan is a flat premium based on your down payment. The premium is not impacted by your credit score. Whereas, on a conventional home loan, the mortgage insurance is impacted by both your down payment and your credit score.
2. FHA loans are less credit score driven than conventional loans. Interest rates and your ability to qualify for a conventional loan are impacted by your credit score.
3. The waiting period after a bankruptcy, a foreclosure or a short sale is much less stringent than a conventional loan.
4. FHA loans can only be used to finance an owner-occupied primary residence. Conventional loans can be used to purchase a primary residence, second home or an investment property.
5. FHA loan limits are set by county/state and are typically less than the conforming loan limit ($726,200).
How do I find the maximum loan limit for my county?