FHA home loans have been around for over 70 years now by serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet Conventional loan requirements, FHA's mortgage insurance allows individuals to qualify who may have been previously denied for a home loan by Conventional underwriting guidelines.
FHA loans benefit those who would like to purchase a home but haven't been able to put money away for the purchase, like recent college graduates, newlyweds, or people who are still trying to complete their education. It also allows individuals to qualify for a FHA loan whose credit has been marred by bankruptcy or foreclosure. It is the only home loan that allows Non-Occupying Co-signers!
FHA loans often work well for first time home buyers because it allows individuals to finance up to 96.5 percent of their home loan which helps to keep down payments and closing costs at a minimum. The 203(b) home loan is also the only loan in which 100 percent of the closing costs can be a gift from a relative, non-profit, or government agency.
Mortgage Insurance on FHA loans comes in two forms. The first is called an Up Front Mortgage Insurance Premium or UFMIP which currently is 1.75% of the total loan amount and is financed into the loan, so you don't have to pay it out of pocket. Basically, 1.75% gets added to the original loan amount to cover this cost. The second component is the monthly mortgage insurance which is added to the total monthly payment. For most borrowers, this will be 0.85% of the total loan amount, divided by 12.
FHA offers fixed rate mortgages, Graduated Payment Mortgages and Adjustable Rate Mortgages. They are available for single family homes, condos, and manufactured homes. Guidelines for income documentation are typically less stringent than required of a Conventional loan.
The FHA program has been in place since the 1930's to help stimulate the housing market by making loans accessible and affordable. Federal Housing Administration (FHA) loans are essentially government insured mortgages which enable borrowers to get access to credit who have:
A low down payment (3.5% down is the minimum)
Average to poor credit (although if you have great credit you can still get an FHA Loan)
Undergone bankruptcy
Had a foreclosed or a short sale
FHA loans are not actually given by the federal government, but instead they are insured by the government. This government backed insurance gives FHA-approved lenders the confidence to offer loans to individuals who would otherwise be considered a higher than average risk for default. FHA offers fixed rate mortgages, Graduated Payment Mortgages and Adjustable Rate Mortgages. They are available for single family homes, condos, and manufactured homes. Guidelines for income documentation are typically less stringent than required of a Conventional loan.
FHA loans are not just for first time home buyers. In fact, there is no limit to the number of properties a person may have owned in the past. One important fact to keep in mind however is that FHA loans are for Owner Occupied transactions only. An Owner Occupied dwelling must reasonably near the location of your work. For example if you rent an apartment in LA, and work there also, but are trying to buy a house in Sacramento, it's going to be really difficult to prove that you are going to live in Sacramento and work in LA. If you are getting a job transfer, or are obtaining a new job then that should be fine as long as your new job is in the same line of work. Most loans will require a minimum of 2 years in the same line of work, so don't go and change professions right before trying to get a loan. I hope this example makes sense.
The Biggest Advantages:
Low Down Payment.....3.5% minimum down payment allowed.
Excellent Rates - better than Conventional rates
Gift funds allowed from relatives up to 6% of the purchase price.
Credit score requirements are less stringent and may allow for the use of alternative forms of credit (ie. rent, utility payments)
The Disadvantages
Although these are disadvantages, they have to be weighed in light of the fact that in many cases this loan enables people to buy a home when they wouldn't have the option otherwise.
Slightly higher mortgage insurance rates than Conventional financing, and for most loans, this stays on for the life of the loan whereas with Conventional financing it is usually removed within 5 years.
1.75% Up front fee. This is the fee which is charged for the benefit of using FHA. This fee is added to your loan amount, so you don't actually pay this out of pocket, but it is financed as part of your loan.
