FHA Loans Mortgage
FHA Loans Mortgages
- A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.
insures lenders against loss in the event that a borrower defaults on their mortgage loan. In this way, FHA encourages lenders to make loans that they might otherwise view as too risky. The principal role of the FHA is to help a segment of the low to moderate income population become homeowners who otherwise might not make it because they have blemished credit or can't come up with the cash needed for the down payment.
are for borrowers who seek loans no larger than the loan size limits set by the program, and either can't meet a 3% down payment requirement, have poor credit, or both.
FHA Loans Mortgages - FHA Borrowers
Most FHA borrowers make down payments of less than 3 percent. FHA allows you to buy a home with 1% down. Private mortgage insurers require 5 percent down on most loans, and only allow 3 percent down on special programs. FHA is also liberal in allowing gifts to be used for paying settlement costs.
FHA borrowers also usually have weaker credit than private insurers accept. FHA allows higher ratios of expense to income, is more tolerant of existing debt, and will allow the income of co-borrowers who don't live in the house to count fully in measuring income adequacy. It is also quite forgiving about bad credit. For example, a borrower need be out of a Chapter 7 bankruptcy for only 2 years, and out of a Chapter 13 bankruptcy for only 1 year.
But there is a third group of FHA borrowers that shouldn't exist. It is comprised of borrowers like you who would meet the requirements of a conventional loan but are steered to an FHA. They pay more for their loan than they should.
FHA Loans Mortgage - Mortgage Insurance Premiums
FHA loans are generally available in the market at about the same interest rate and points as conventional loans with the same term. There may be a difference in mortgage insurance premiums, however.
On an FHA the mortgage insurance premium is 1.5% of the loan amount paid up front plus .5% of the loan balance paid monthly. The premium is the same regardless of the down payment.
On conventional loans, the insurance premium depends on the down payment. With 10% or more down, the premium on conventional loans is lower. Borrowers who can put 10% down and have good credit will usually do better with a conventional loan.
FHA Loans Mortgage - Zero-Down-Loans
Recently, an additional option has opened for borrowers who are unable to make a down payment but have strong credit. The interest rate is higher on these zero-down-loans, but you don't have to pay for mortgage insurance.
If a borrower has credit good enough for FHA but not for conventional financing except at sub-prime terms, the FHA will be better if the borrower can improve his credit over the first year or two of the loan and then refinance. FHA loans do not carry prepayment penalties, which most sub-prime loans do, and most of the mortgage insurance premium will be refunded.
FHA allows a contribution to the down payment, but it must be an outright gift from a family member or friend, the borrower’s employer or union, a charity, a government agency, or a nonprofit corporation or charity. Such gifts don’t cause price inflation, so the borrower’s equity is protected.
FHA allows approved entities to affiliate with sellers. Several nonprofit corporations have developed programs offering down payment assistance using funds provided by sellers. These include www.nehemiah.org, www.partnersincharity.org and www.ameridream.org.
These programs have opened homeownership opportunities for a segment of the population that would otherwise be shut out of the market. On the other hand, since the funds for down payment assistance come from sellers, they cause price inflation. The combination of direct seller contributions to settlement costs on an FHA loan and indirect contributions through down payment assistance programs can add up to 9-10% of sale price.
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