FHA Loans

 An FHA loan is a loan insured by the Federal Housing Administration (FHA). Most of the FHA programs are designed for first time homebuyers and low to moderate-income borrowers. FHA loans have lower down payment requirements and are easier to qualify for than conventional loans. FHA loans cannot exceed the statutory limit, which varies according to the county you live in.
 
There are many good reasons to obtain an FHA loan including:
Your complete down payment and closing costs can be gifted by a family member
3 1/2 percent minimum down payment with the buyer having a minimum of 3 1/2 percent committed in the transaction (can be gifted).
Separate approval from PMI companies not required.
Minimal assets to close (3 1/2 percent).
Non-occupying co-borrowers are o.k. (must be family members).
Up to 3 percent sales concessions permitted that can cover discount points, prepaids, escrows and closing costs.
More liberal qualifying ratios (31%/43%) that can be exceeded with compensating factors (i.e. larger down payment, reserves, excellent credit, etc.).
Reserves not required on one or two family houses.
FHA is more lenient on negative credit (620 minimum FICO score)
Can provide non-resident aliens with affordable financing.
High loan-to-value financing on FHA approved condominiums.
High loan-to-value financing on multi-family units (up to four units).
FHA counts 85 percent rental income on owner occupied multi-family units.
All FHA loans must be full income documentation and owner occupied.

 
 
 
Lower Rates
 An FHA loan has competitive interest rates because the Federal government insures the loans for lenders. Always compare an FHA loan with other loan types.  
 
 
Easier to Qualify
 Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify. 
 
 
If You Have Less Than Perfect Credit
 You don't have to have perfect credit to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan.  A minimum 620 FICO score is required for FHA financiang. 
 
 
More Protection to Keep Your Home
 The FHA has been around since 1934 and will continue to be here to protect you. Should you encounter hard times after buying your home, the FHA has many options to help you keep you in your home and avoid foreclosure.
 
FHA does not give money to people for a home and it does not set the interest rates on mortgages it insures. FHA insures loans for lenders against defaults. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. An FHA-approved lender can help you start the loan application process.
 
You may use an FHA-insured mortgage to purchase or refinance a new or existing 1-4 family home or a condominium unit. 
 
 
How does a FHA loan Compare to a Conventional Loan?
 Conventional loans usually require a larger down payment. And, if you have less than perfect credit you may not qualify for many conventional loans and find yourself being offered loans with higher interest rates and/or fees than you expected. The best thing to do is compare the cost of the conventional loan to an FHA loan line-by-line. What are the fees on each? What is the interest rate? How much is the mortgage insurance on each? How much down payment is required? For some borrowers, a conventional loan may be less expensive. For many others, it will be more expensive than FHA.
 
 

FHA loans are available for both purchases and refinances, including cash out refinances. FHA loans can be used to finance residential 1-4 unit properties, including condominiums, manufactured homes and mobile homes (provided it is on a permanent foundation), but you may hold only one FHA loan at any given time.

Because FHA loans are government-insured, they have easier credit qualifying guidelines than most lenders, as well as relatively low closing costs and down payment requirements. With an FHA loan, your down payment can be as low as 3.5% of the purchase price, and closing costs can be bundled with the loan amount.

Another advantage of an FHA loan is that they start at lower-than-market interest rates, and carry fewer costs than conventional mortgages. FHA loans can be either adjustable-rate mortgages or fixed-rate mortgages. If the interest rate is adjustable, it will be based on the 1-Year Constant Maturity Treasury Index, which is the most widely used mortgage index.

If the loan-to-value is greater than 80%, mortgage insurance is required. FHA loans also have an upfront mortgage insurance premium equal to 1.5% – 3% of the loan amount. This is typically bundled into the loan amount and paid throughout the life of the loan. If the loan-to-value exceeds 90%, you will have to pay an annual mortgage insurance premium of 0.5% of the loan amount until the loan balance falls back below the limit.

The FHA, like other banks and lenders, has guidelines that need to be met, but generally makes it easy for potential homeowners to qualify for a loan.

Make sure you compare FHA loans with conventional loans as well. There will be cases when the benefit of one outweighs the other. FHA loans are not guaranteed to be a better deal than other mortgages, so take the time to shop around. And watch out for unscrupulous FHA-qualified lenders who may attempt to misinform you.

Since the mortgage crisis struck, FHA loans have become increasingly popular, essentially replacing subprime lending, largely because of their relatively easy underwriting requirements and government guarantee.
It's a common misconception, but in fact, the FHA is not a lender. Nor does the FHA give people money to buy a home or set interest rates on home loans. Rather, the FHA, or Federal Housing Administration, is a federal government agency that offers mortgage insurance on loans originated by lenders that are approved by the agency. This insurance protects the lender in case the borrower defaults on the loan.

The FHA was set up in 1934 after the Great Depression and is a division of the U.S. Department of Housing and Urban Development, or HUD. FHA-insured loans enjoyed decades of popularity, but then fell out of favor during the recent housing boom in part because lenders began to offer subprime loans that had artificially low initial interest rates and monthly payments. These subprime loans have since proved disastrous. As a result, lenders have tightened their credit standards and borrowers have flocked to the comparative safety and familiarity of FHA-insured loans.

In 2007, the FHA backed about $60 billion of residential mortgages. In 2008, that figure is expected to skyrocket to almost $224 billion. That means FHA-backed loans now make up a huge segment of the U.S. mortgage market. For many borrowers, an FHA-insured loan is the only option they have to buy a home or refinance their current mortgage. Our FHA loan comparison questionnaire helps borrowers compare FHA loans with other types of loans.

Who should consider an FHA-insured loan?
According to the FHA's Web site, FHA-backed loans are especially attractive for first-time homebuyers who fit certain criteria.

Buyers attracted to FHA-backed loans

Have a little cash for a down payment and closing cost.
Have imperfect credit
Want to keep their monthly payments as low as possible.
Are concerned that they may not be able to qualify for a loan.
Are concern about the possibility of monthly payment increase.

What are the advantages of FHA-insured loans?
There are several advantages to obtaining a loan backed by the FHA.
Competitive interest rates.
Smaller down payment required as a percentage of the purchase price.
A gift from a family member, employer or charitable organization can be put toward the down payment.
Minimum credit score not required, though some lenders expect a score of at least 580.
Lender can consider payment of utility bills, rent, auto insurance premiums and other items if the borrower doesn't have an established credit history.
 

Loan Types

Fixed Rate Loans
 Most FHA loans are fixed-rate mortgages (loans). In a fixed rate mortgage, your interest rate stays the same during the whole life of the loan, normally 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your monthly payment will be, and you can plan for it.  
 
 
Adjustable Rate Loans
 Most first-time homebuyers are a little stretched financially, so they want payments as low as possible at the beginning. With FHA's adjustable rate mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. FHA uses the 1-Year Constant Maturity Treasury Index (1 Yr CMT the most widely used index, to calculate the changes in interest rates. An index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time.
 
The maximum amount that the interest rate on your loan may increase or decrease in any one year is 1 or 2 percentage points, depending upon the type of ARM you choose. Over the life of the loan, the maximum interest rate change is 5 or 6 percentage points from the initial rate, again depending upon the type of ARM you choose. The advantage of an ARM is that you may be able to afford more house; because your initial interest rate will be lower, as will your payment.