Is an FHA mortgage in your future?
Julie Garton-Good, GRI, DREI

Federal Housing Administration (FHA) loans were originally thought to be only for low or moderately low income home buyers. But today, because of low down payment guidelines and reasonable closing costs, many people are using them to finance their home purchases. Should you consider one? Let's cover the pros, the cons and then see if you match an FHA loan-buyer profile.

What are FHA loans? Federal Housing Administration (FHA) financing is a type of federally insured loan that protects the lender against the borrower's default for the life of the loan. It was created by HUD (Housing and Urban Development) as a way to boost home ownership among moderate-income Americans.

What are the pros of using an FHA loan? The benefits of using an FHA loan include:

  1. Qualifying guidelines can be more flexible since they target the moderate-income home buyer. (They currently use qualifying ratios of up to 29 percent of your monthly gross income going towards your house payment and up to 41 percent of your monthly gross income going towards your house payment plus long-term debts that can't be paid off in 10 months).
  2. FHA loans provide flexibility for borrowers who have had previous credit blemishes and/or bankruptcy. In fact, if it's been one to two years after discharge of a bankruptcy and the borrower can prove that credit has been rebuilt, he may be able to obtain an FHA loan.
  3. A low down payment is the hallmark of the FHA loan. You only need 3 percent down on acquisition prices of $50,000 or less. For prices exceeding $50,000, the down payment is 3 percent of the first $25,000 and 5 percent of the balance --up to your geographical area maximum. (Ask your Realtor or your local lender what the maximum loan amount is for your area.)

What are the cons of using an FHA loan? Negatives could include:

  1. The FHA mortgage insurance premium (MIP) covers the entire loan for the term of the loan. Currently, MIP is equal to 2.5% of the loan amount (the premium can be paid in cash at closing or financed into the loan); plus an annual premium of one-half of one percent, paid monthly in the payment. For example, a $50,000 loan would cost $1,250 in up-front premiums plus an $20.83 per month recurring premium added on to the monthly payment.
  2. FHA has fairly stringent property guidelines that make some properties unavailable for FHA financing or that may require repairs before the property can qualify.
  3. The loan amount caps for each region make FHA loans unavailable to some home buyers if median-priced homes exceed this maximum.

Do you fit the FHA home-buyer profile? You may be a likely candidate for an FHA loan if you:

  1. Have a minimal down payment;
  2. Will be accepting a gift for either your down payment or closing costs since this is allowed with FHA loans;
  3. Need underwriting assistance to compensate for credit problems, previous bankruptcy and/or previous foreclosure;
  4. Want to or have negotiated with a seller or other third party to pay a portion or all of the closing costs; or
  5. Want a loan that could be assumed (with qualifying) should you desire to sell the property.

Don't overlook the many benefits of using FHA financing. Your Realtor will be glad to show you properties where sellers have agreed to offer FHA financing and to put you in contact with lenders who can pre-approve you for an FHA loan before you even start the house-hunting process.