FHA Loans for the Rest of Us

When the Federal Housing Administration was created in 1934, prospects were bleak in the housing market. Out of ten families, only four were able to own homes. Two million construction workers were jobless and The Great Depression was at its peak. Traditional mortgage requirements were far too steep for the vast majority to meet. FHA loans opened up a way for more Americans to realize their dreams of owning a home.

How Does FHA Financing Work?

FHA Fixed RAte MortgageThe goal in 1934 was to create an alternative loan option for those who could not meet the traditional requirements, while also boosting growth in the housing market. This is accomplished in two ways. The Federal Government provides financial backing to approved lenders through mortgage insurance. Because the lender has some protection in case a homeowner fails to make a payment on the mortgage, they can take greater risks when considering potential homeowners. FHA is also the only government program that is not dependent on taxpayer’s dollars. Mortgage insurance payments are poured back into the account that is used to operate the program. All expenses are covered by self-generated income. Because it can operate without burdening the economy, a substantial stimulus is created in the housing market, which means more jobs for construction workers, building suppliers, etc. and more potential homeowners! This is the beauty of FHA financing. Out of poverty and restriction we have growth and opportunity!


Financial Benefits in More Lenient Requirements

The most profound advantage to someone seeking this type of loan is a lower down payment. While conventional loans require anywhere from five to twenty percent of the total loan amount upfront, these loans come in as low as 3.5 percent. For a $300,000 conventional loan you will make a down payment in the range of $15,000-$60,000. With an FHA loan you could pay as little as $10,500. If you have ever tried to make big purchases on an average American income, you know how significant this is. The lower the down payment, the easier it is to procure, possibly from friends or family. It can make the difference between none achievable and believable.

There is the option to include closing costs in the overall loan which means even less money is required upfront. This type of loan is assumable, so if you decide to sell your home it may be assumed by, or transferred to, the potential buyer. Another key advantage is that you can qualify with a credit score much lower than is required by a traditional loan. Even if you have gone through bankruptcy or been foreclosed upon in the past, you may still be able to qualify for a Federal loan. A lender will take into consideration all of the borrower’s information; a negative in one area can be balanced out by a positive in another.

Disadvantages to Consider

The most significant downside to this type of mortgage is that insurance is required. This includes a premium that is either paid in full up front or added onto the loan, as well as a monthly payment. The Upfront Mortgage Insurance Premium (MIP) is 1.75% of the loan and must be paid at closing or worked into the financing for the mortgage. So for a $200,000 loan you would pay a premium of $3500. This rate remains the same no matter what your credit score is.

The Annual MIP is a monthly charge that will be figured into every mortgage payment. The percentage is calculated according to the length and size of your loan. They also use your Loan To Value (LTV) ratio, which is the total amount of the loan divided by the actual appraised value of the property being purchased. For example, if you purchase a home for $200,000 and the appraised value is $250,000, your ratio is 80%. As the percentage goes up the likelihood of the lender taking a loss increases and the loan becomes riskier. A low percentage figures in to a lower annual MIP. It is especially beneficial to a borrower who has other high-risk characteristics such as low credit score and high loan amounts. The good news is that if you are purchasing a single-family home with an LTV of 78 percent or less and a term of 15 years or less you will not have to pay an annual premium at all.

Another thing to keep in mind is that the house being purchased must meet certain requirements and be appraised by an approved appraiser in order to qualify for this type of loan. There is also a limit to the size of the loan that differs from county to county.

With nearly thirty-four million insured properties since its founding, the FHA offers many benefits and considerations to the 99% of Americans with less than ideal circumstances. If you have been through hard times financially but still want to provide a home for your children and grandchildren, a federally backed loan may be the answer to your prayers.

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