In the wake of the housing bubble's collapse, FHA loans have taken on renewed importance for today's mortgage borrowers.
Simply stated, an FHA loan is a
mortgage
insured by the Federal Housing Administration, a government agency
within the U.S. Department of Housing and Urban Development. Borrowers
with FHA loans pay for mortgage insurance, which protects the lender
from a loss if the borrower defaults on the loan.
Because of that
insurance, lenders can -- and do -- offer FHA loans at attractive
interest rates and with less stringent and more flexible qualification
requirements.
Following are seven facts all buyers should know about FHA loans
As of September 2010, minimum credit scores for FHA loans depend on
the type of loan the borrower needs, according to the FHA, but scores
should be 580 or better.
Those with credit scores between 500 and 579 are limited to borrowing 90 percent loan-to-value.
A
credit score of 500 or less generally means you won't be eligible. The
FHA will make allowances under certain circumstances for applicants who
have what it calls "nontraditional credit history or insufficient
credit" if they meet requirements. Ask your FHA lender or an FHA loan
specialist if you qualify.
The FHA requires a
down payment
of just 3.5 percent of the purchase price of the home. That's a
fraction of the percentage typically required on most other loans and a
"huge attraction," says Dennis Geist, senior director, compliance and
fair lending at Treliant Risk Advisors and formerly a vice president of
government programs for another lender.
Borrowers can use their
own savings to make the down payment. But other allowed sources of cash
include a gift from a family member, or a grant from a state or local
government down payment assistance program.
The FHA allows home sellers, builders and lenders to pay some of the
borrower's closing costs, such as an appraisal, credit report or title
expenses. For example, a builder might offer to pay closing costs as an
inducement for the borrower to buy a new home.
Lenders typically charge a higher interest rate on the loan if they agree to pay closing costs. Borrowers can use the
good faith estimate
of closing costs -- commonly known as the GFE -- to compare interest
rates and closing costs on different loans and figure out which option
makes the most sense.
Because the FHA is not a lender, but rather an insurance fund,
borrowers need to get their loan through an FHA-approved lender (as
opposed to directly from the FHA). Not all FHA-approved lenders offer
the same interest rate and costs -- even on the same FHA loan.
Costs,
services and underwriting standards will vary among lenders or mortgage
brokers, so it's important for borrowers to shop around.
Two mortgage insurance premiums are required on all FHA loans: The
upfront premium is 1.75 percent of the loan amount and is paid when the
borrower gets the loan but can be financed as part of the loan amount.
The
second is the annual premium, which varies based on the length of the
loan, the amount borrowed and the initial loan-to-value ratio (LTV). The
current annual premiums for loans less than $625,500 are:
- 15-year loan, LTV more than 90 percent: 0.70 percent
- 15-year loan, LTV 90 percent or less: 0.45 percent
- 30-year loan, LTV more than 95 percent: 1.35 percent
- 30-year loan, LTV 95 percent or less: 1.3 percent
"The perception is that that sounds expensive," Geist says.
However,
he adds, borrowers need to compare the FHA-insured loan to a loan
that's not FHA-insured (and consequently requires a much larger down
payment). In many cases, the FHA loan is still the best choice, he says.
The FHA has a special loan product for borrowers who need extra cash to
make repairs to their homes. The chief advantage of this type of loan,
called a
203(k),
is that the loan amount is based not on the current appraised value of
the home but on the projected value after the repairs are completed. A
so-called "streamlined" 203(k) allows the borrower to finance up to
$35,000 in nonstructural repairs, such as painting and replacing
cabinets or fixtures, Geist says.
FHA insurance isn't intended to be an easy out for borrowers who feel
unhappy about their mortgage payments. But loan servicers can offer some
relief to borrowers who have an FHA-insured loan, have suffered a
serious financial hardship and are struggling to make their payments.
That relief might be a temporary period of forbearance, a
loan modification that would lower the interest rate or extend the payback period, or a deferral of part of the loan balance at no interest. Written by Marcie Geffner.
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