FHA LOANS

A Federal Housing Administration (FHA) mortgage is a home mortgage that is insured by the government and issued by a lender, a bank or another financial institution that is approved by the Agency (Federal Housing Administration).

The FHA loan is designed to help low- to moderate-income families finance their home purchases by allowing for a so-called Debt-to-Income Ratio to be higher than most Conventional loans permit.

FHA loans also require a lower minimum down payment (3.5% is the very minimum) than many conventional loans require, as well as accepts Borrowers with lower credit scores (presently a minimum of 580 credit score is acceptable by some lenders). This type of financing is particularly appealing to first-time homebuyers.

Since FHA borrowers tend to be riskier and these loans are insured by the Agency – there is a mandatory Mortgage Insurance (MI) required. There are two types of the PMI on an FHA loan:

  1.   Up-Front Mortgage Insurance Premium (UFMIP) in the amount of 1.75% of the loan amount and
  2.   A mandatory Monthly MI – usually in the amount of 0.80-0.85% of the loan amount.

Both types of the MI are mandatory and non-removable unless the loan gets refinanced into a Conventional loan (provided that the new loan’s Loan-to-Value is 80% or less).

FHA loans are intended to help those Borrowers that can not easily be approved by private lenders and because they are insured, lenders and banks are willing to accept the Borrowers with lower credit scores, lower down payment amounts and higher debt-to-income ratios.

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