The facts about FHA loans

The facts about FHA loansWith the economy stalled and the housing market still sluggish, no one is sure what it will take to get buyers into new homes. Obtaining an affordable loan -- any loan, in many cases -- seems insurmountable. But there is a way.

Hello, FHA! These government-backed loans, which require smaller down payments and are easier to qualify for, are more popular than ever. The Federal Housing Administration currently insures 6.1 million single-family mortgages and 13,000 insured multifamily projects, according to the U.S. Department of Housing and Urban Development.

"FHA loans are more popular than ever because of the low down-payment requirement," says Mona Dehmohseni, broker and owner of AML Mortgage Associated Inc. in Van Nuys, Calif. "During the housing peak, I wrote no FHA loans. Now I'm writing three or four every month."

An FHA loan is insured by the government's Federal Housing Administration. It is the largest mortgage insurer worldwide, providing insurance on loans made only by FHA-approved lenders. FHA itself is not a lender. Counselors and lenders can be found at HUD's Web Site.

Because FHA loans are insured by the government, lenders are able to offer borrowers better deals -- loans with better interest rates. Also, it's easier to qualify for an FHA loan. FHA lenders offer 15- and 30-year mortgages.

Whereas most lenders require a minimum 20% down payment on the purchase price of a home, the FHA requires only 3.5% down. Borrowers may use their own money to make a down payment, or they may use other sources of cash, such as gifts from relatives and/or grants from nonprofit organizations or local or state government down-payment assistance programs. Lenders may use greater flexibility in calculating household income and payment ratios.

While credit scores often are the bane of borrowers seeking a home loan, the FHA does not require a minimum credit score. Lenders may use their own leeway in determining a borrower's creditworthiness. Lenders may impose their own requirements beyond those of the FHA. Interest rates and costs may vary, however, so best to shop for the best deals.

Further details to consider:
  • FHA loans require two mortgage insurance premiums: The upfront one, which is 2.25% of the loan amount and must be paid when you get the loan. It can be financed and may be wrapped into your loan payments. The annual premium is 0.55% of the loan amount. It is paid in groups of 1/12th of the total loan amount; and are included in your monthly mortgage payments.
  • Borrowers do not have to shoulder all of the closing costs. The FHA allows home sellers, lenders and builders to pay some of those costs.
  • If you need cash to make repairs on your home, borrowers may get an FHA 203(k) loan, based on the expected value of your home after the repairs, not the appraised value of your home before the work is done. FHA's Streamline Limited Repair Program allows you to finance up to $35,000 in cosmetic repairs.
  • FHA loans are assumable, which means you can transfer your loan to the buyer of your home. That new owner may take over your loan without paying for a new loan. The buyer must meet the credit standards for the loan, however.
  • If you want a fixer-upper, FHA provides loans to buy a home and fix it, and all of the costs are wrapped into one loan.
"FHA loans are good for borrowers, and safe for lenders," says Dehmohseni. Can't argue with that.
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