The "go to" loan for most home buyers

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What is a FHA Loan?

A FHA loan is a mortgage insured by the Federal Housing Authority.

This is a very popular option for first time home buyers. The reason why most home buyers, first time home owners, or people who just repaired their credit report choose FHA loans is because it’s back by the government. FHA programs allow credit scores as low as 550, down payments can be gifted, and streamline programs with no appraisal. The down payment amount ranges on the credit score (3.5%-10%).  At My Loan is Your Loan, we work with down payment assistance programs for FHA financing. For most, FHA loans is the “go to” when looking to finance your home.

 

How FHA Loans Work

It’s important to note that the Federal Housing Administration doesn’t actually lend you money for a mortgage. Instead, you get a loan from an FHA-approved lender, like a bank, and the FHA guarantees the loan. You pay for that guarantee through mortgage insurance premium payments to the FHA. Your lender bears less risk because the FHA will pay a claim to the lender if you default on the loan.

An FHA loan requires that you pay two types of mortgage insurance premiums – an Upfront Mortgage Insurance Premium (UFMIP) and an Annual MIP (charged monthly). The Upfront MIP is equal to 1.75% of the base loan amount (as of 2018). You pay this at the time of closing, or it can be rolled into the loan. If you’re issued a home loan for $350,000, for example, you’ll pay an UFMIP of 1.75% x $350,000 = $6,125. The payments are deposited into an escrow account set up by the U.S. Treasury Department, and the funds are used to make mortgage payments in case you default on the loan.

Despite the name, you make Annual MIP payments every month. The payments range from 0.45% to 1.05% of the base loan amount, depending on the loan amount, length of the loan, and the original loan-to-value ratio (LTV). The typical MIP cost is usually 0.85% of the loan amount. If you have a $350,000 loan, for example, you will make annual MIP payments of 0.85% x $350,000 = $2,975, or $247.92 monthly. This is paid in addition to the cost of UFMIP.

HOW LONG YOU PAY THE ANNUAL MORTGAGE INSURANCE PREMIUM (MIP)
TERM LTV% HOW LONG YOU PAY
THE ANNUAL MIP
≤ 15 years ≤ 78% 11 years
≤ 15 years 78.01% to 90% 11 years
≤ 15 years > 90% Loan term
> 15 years ≤ 78% 11 years
> 15 years 78.01% to 90% 11 years
> 15 years > 90% Loan term

Lenders Consider Work History

Your lender will evaluate your qualifications, too, as it would any mortgage applicant’s. But Instead of using your credit report, a lender may look at your work history for the past two years as well as other payment-history records, such as utility and rent payments. You can qualify for an FHA loan if you’ve gone through bankruptcy or foreclosure, provided you’ve re-established good credit. In general, the lower your credit score and down payment, the higher the interest rate you’ll pay on the mortgage.

Keep in mind, when you buy a home, you may be responsible for certain out-of-pocket expenses such as loan origination fees, attorney fees and appraisal costs. One of the advantages of an FHA mortgage is that the seller, home builder or lender can pay some of these closing costs on your behalf. If the seller is having a hard time finding a buyer, they might just offer to help you out at closing time as a deal sweetener.

Types of FHA Loans

In addition to traditional first mortgages, the FHA offers several other loans programs, including:

  • Home Equity Conversion Mortgage (HECM) program – a reverse mortgage program that helps seniors aged 62 and older convert the equity in their homes to cash while retaining title to the home. You choose how to withdraw the funds, either as a fixed monthly amount or a line of credit (or a combination of both).
  • FHA 203k improvement loan, which factors in the cost of certain repairs and renovations into the loan. This one loan allows you to borrow money for both home purchase and home improvements, which can make a big difference if you don’t have a lot of cash on hand after making a down payment.
  • FHA’s Energy Efficient Mortgage program is a similar concept, but it’s aimed at upgrades that can lower your utility bills, such as new insulation or the installation of new solar or wind energy systems. The idea is that energy-efficient homes have lower operating costs, which lower bills and make more income available for mortgage payments.
  • Section 245 (a) loan – a program for borrowers who expect their incomes to increase. Under the Section 245(a) program, the Graduated Payment Mortgage starts with lower initial monthly payments that gradually increase over time, and the Growing Equity Mortgage has scheduled increases in monthly principal payments that result in shorter loan terms.
THE 5 TYPES OF FHA LOAN
FHA LOAN TYPE WHAT IT IS
Traditional Mortgage A mortgage used to finance a primary residence
Home Equity
Conversion
Mortgage
A reverse mortgage that allows homeowners aged 62+ to exchange home equity for cash
203(k) Mortgage
Program
A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills
Energy Efficient
Mortgage Program
A mortgage that includes extra funds to pay for energy-efficient home improvements intended to lower your utility bills
Section 245(a) Loan A Graduated Payment Mortgage (GPM) with lower initial monthly payments that gradually increase (used when income is expected to rise), and a Growing Equity Mortgage (GEM) where scheduled increases in monthly principal payments result in shorter loan terms

Learn more at https://www.investopedia.com/terms/f/fhaloan.asp#ixzz5VRH

 

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