|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
What are the pros of using an FHA loan? The benefits of using an FHA
- 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).
- 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.
- 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:
- 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.
- FHA has fairly stringent property guidelines that make some properties
unavailable for FHA financing or that may require repairs before the property
- 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:
- Have a minimal down payment;
- Will be accepting a gift for either your down payment or closing costs
since this is allowed with FHA loans;
- Need underwriting assistance to compensate for credit problems, previous
bankruptcy and/or previous foreclosure;
- Want to or have negotiated with a seller or other third party to pay a
portion or all of the closing costs; or
- 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.