The FHA (Federal Housing Administration) loan is a home loan product that is offered by approved lenders and backed by the government. FHA falls under HUD (Housing and Urban Development). The program was created in the 1930s to help combat all of the foreclosures of the time. Some of the benefits of the FHA loan are:
The short answer is there are no restrictions on the FHA loan unlike some loan types. The USDA Loan has household income limits and property location requirements. The VA home loan is only for Veterans. The only thing the FHA loan has is a maximum loan amount based on the income for the area. The loan product is utilized by First Time Home Buyers as well as move-up home buyers.
The minimum credit score for the FHA loan is 580 for loans with at least 3.5% down and 500 for loans with 10% or more to put down. There are a few caveats to this. First it’s important to understand this is what FHA’s min scores are however each lender can have their min scores above and beyond this. Another important thing is that just because a borrower meets the minimum credit score set forth by their lender and FHA doesn’t mean their loan is automatically in approved status. There are many other qualifying factors such as derogatory accounts and debt to income.
While the FHA loan does have many unique features that may help borrowers who could not typically qualify for a Conventional loan it does have one drawback. To fund the program the government has two types of mortgage insurance associated with the loan. The first is Upfront Mortgage Insurance Premium (UFMIP). The name is exactly what it is. It’s a one-time upfront premium that is usually rolled into the total loan. The current factor used is 1.75%. Example: $200,000 loan amount x 1.75%=$3,500. The borrower can pay this at closing however most people elect to roll it into the loan. Which would make this new loan amount $203,500? In addition to the UFMIP the FHA loan also has an Annual Mortgage Insurance Premium that is charged monthly. The current factor for the monthly premium for a 30-year mortgage with 3.5% down is .85% so for that same $200,000 loan amount the borrower would pay $170 per month. That factor is reduced a little with additional money down or a shorter term. The big catch to the FHA MIP is that unlike the conventional loan it is for the life of the loan when a borrower does a 30-year mortgage and when they put the minimum down payment. It is capped at 11 years on a 15-year mortgage and when the borrower puts down 10% or more. While some view this as expensive it’s important to understand that this is how FHA funds the program.
While not all lenders offer the FHA loan there is a significant amount that does participate in the program due to the loan product's popularity. To be an approved FHA lender a company must have their FHA designation which is called their direct endorsement. This comes after a lender applies and completes a certain amount of test cases that are reviewed and approved by FHA. Once FHA feels the lender is ready they sign off and issue the endorsement. From this point forward the lender is approved to make underwriting decisions on the loan product. FHA does supervise the performance of the lender's FHA loans to ensure they are not making sure the lender's loans do not exceed their peer groups default rates.
Primary Residential Mortgage, Inc.
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