What is an FHA Loan?
The Federal Housing Administration (FHA) is the largest mortgage insurer in the world. They insure single, multi-family and manufactured homes. The FHA doesn’t actually lend you the money, they guarantee the loan so the lender doesn’t take on a financial risk by extending you credit. The FHA guarantees that a lender won’t have to write off a loan if the borrower defaults because the FHA will pay. There are pros and cons to an FHA loan, so it is important to make sure you discuss all the financing options available to you with your licensed, professional, Title Mortgage Solution loan officer.
Most often, the FHA mortgage appeals to:
- First-time home buyers.
- Clients with lower credit scores.
- Clients who want to make a low down payment.
First-time home buyers may use the FHA mortgage option to secure their first home, improve their credit score, and build equity in a home. Then the home buyer should consider refinancing in the future with a conventional mortgage with a better credit score and a similar or lower rate without mortgage insurance.
Clients with lower credit scores will notice the greatest differences between an FHA loan and a conventional loan with the flexibility of the credit requirements. Currently, we have access to FHA financing with credit scores down to 620. We also have conventional loan options for as low as 620 with 3% down, but the biggest differences at the lower scores are the costs involved between higher interest rates and mortgage insurance.
Clients who want to make a low down payment can put as little as 3.5% of the purchase price of the home down. The 3.5% required by FHA versus the 3% on conventional loans is a little more money down but if you’re short on funds when you’re purchasing, FHA allows up to 6% seller contributions versus conventional’s 3% allowed with the minimum down-payment. The extra 3% in seller’s contributions will help clients achieve their homeownership goals.
With all the great features the FHA loans offer, there are also downfalls to the loans. FHA loans include both monthly Mortgage Insurance Premiums (MIPS) charged on a monthly basis, and charge an upfront MIP or guaranty fee of 1.75% of the loan amount. Assuming the down payment is the minimum 3.5%, you will be required to pay monthly MIP for the lifetime of the loan. This means that as long as you have your FHA loan, the MIP will never be removed from the payment. In order to eliminate the MIP you will have to pay your loan off or refinance out of an FHA loan into another product. Conventional loans charge PMI if the down payment is less than 20%, but unlike FHA, the PMI will eventually drop off. Once you pay your loan down to 78% of the sales price, PMI will automatically be removed. Removal of PMI can be requested if 20% equity is reached early.
The FHA has always been strict with its rules with respect to property condition. The FHA will not insure homes failing to meet basic safety and habitability requirements. Home buyers wishing to use FHA backed financing should keep this in mind. There are minimum standards to which all FHA homes are held. Make sure to discuss these requirements with your loan officer.
In addition to the FHA having their strict property requirements, FHA limits the amount of money you can borrow for a home in New Hampshire & Vermont counties. Make sure to discuss this with your loan officer to confirm the limits at the time.
If you qualify, a conventional mortgage will typically be a better mortgage option than FHA, but make sure to discuss all your available financing options with your Loan Officer. If you have questions on an FHA or any other loan type contact our Hanover, NH office or our Burlington, VT office today!