FHA Loan
An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
An FHA loan allows the least amount of down-payment. Currently a minimum of 3.5% of the purchase price is required from the borrower. That 3.5% is allowed to be a gift from a family member or employer to the borrower. 100% of it is allowed to be a gift.
Sellers are allowed to contribute to the closing costs of the buyers. Currently up to 6% of the purchase price can be paid by the seller, towards the buyers closing costs. It is fairly common for some closing costs to be paid by the seller at this time, even if the seller is a bank. They may not allow the full 6%.
A buyer can literally get a home with no money if the down-payment is a gift and the seller paid all the closing costs!
An FHA loan has mortgage insurance. There is an up front fee that goes to FHA at closing which is added to the loan amount, it is not required to be paid by the borrower out of ones pocket. The fee is currently 1.75% of the loan amount.
There is a myth that an FHA loan requires more work. True there is a bit more paperwork and processing on the part of the person processing the loan, but that does not mean it is harder for the borrower.
The advantage of an FHA loan are
- Low down payment of 3.5% of the purchase price
- Down-payment is allowed to be a gift
- Great rates, lower than a conventional loan
- Not as picky about your credit score
- More forgiving of derogatory credit items
- Less time to wait after bankruptcy or short sale
- Flexible sources of down payment funds
- Seller is allowed to pay ALL of your closing costs
- The loan is assumable. If you sell your home and interest rates are higher (they will be) and someone qualifies for and FHA loan, they can assume your loan and your interest rate.
The biggest disadvantage to FHA is that in June of 2012, a change was made to the monthly mortgage insurance. It used to be that you had to have monthly mortgage insurance on an FHA loan for a minimum of 5 years and then it could go away. As of June 2012, monthly mortgage insurance on an FHA loan is for the life of that loan. That means that in order to have it go away, a refinance would be done once there was sufficient equity in the property.
Even with the above mortgage insurance rule in effect, it still makes sense for many home buyers to choose this loan as an option for a lot of reasons.
I like to get with you (the home buyer) and understand your situation (income, credit, cash to close) and show you the differences between loan programs available so that you understand them and can choose what is best for you.