What is a FHA Loan?
In 1934, the Federal Housing Administration (a.k.a. FHA) was established to improve U.S. home ownership standards and provide a home mortgage financing system with mortgage insurance coverage, so families that may have not been able to purchase a home could finally buy their dream home.
FHA does not make actually home loans, it just insures a home loan, so if a homebuyer defaults on their mortgage, the actual home loan lender is paid from the FHA mortgage insurance fund.
- FHA allows you to buy a house with as little as 3.5% down.
- FHA is ideal for the first-time homebuyers unable to make larger down payments.
- FHA is a solution for those who may not qualify for a conventional loan.
- Down payment assistance programs can be used for down payment and closing cost assistance.
FHA Loans vs. Conventional Home Loans
The main difference between a FHA Home Loan and a Conventional Home Loan is that a FHA loan requires a lower down payment (only 3.5%), and the credit qualifying criteria for a borrower is not as strict, usally as low as 580 Credit Score is allowed. This allows those without a credit history, or with minor credit issues to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting.
Mortgage Insurance Premiums
FHA charges an upfront mortgage insurance payment added to your loan amount (also called “MIP”) along with annual mortgage insurance premiums paid on a monthly basis. The upfront MIP is the same for all FHA Home Loans, which is 1.75% of the loan amount and is financed directly into the mortgage. Remember, payment for mortgage insurance from borrowers are mandatory in order to protect lenders from losses in instances of defaults on loans. The annual. monthly mortage payment (also called “Private Mortgage Insurance” or “PMI”) varies based on the loan term, loan amount, and the loan-to-value (LTV) ratio. Use the tables below to figure out proper MIP rates.