Years ago, FHA home loans were mostly for first time home buyers with poor credit. But since the housing bubble burst in 2008, the FHA program has become a very common way for regular borrowers to finance their home.
As of 2017, millions of people finance their home purchase with an FHA home loan. This government backed loan is the most common option for people who have trouble qualifying for a conventional home loan.
Here are 8 things you should know about the FHA home mortgage program before you start loan shopping:
#1 Uncle Sam Is Not the Lender
You do not get your home loan from FHA. The government agency is merely the insurer of the loan that is made by a private lender. This means that if you get a mortgage and don’t pay, the FHA will reimburse the lender for much of its losses.
It does this by charging the borrower both an up front mortgage insurance premium and an annual premium that is built into your mortgage payment. Because the government is the backer of the loan, FHA approved lenders can offer credit to customers who may have difficulty in getting a regular loan.
#2 FHA Loans Are Versatile
Some people still think that FHA loans are only for people with low income, poor credit and small loan amounts. Not true. You can use FHA home loans for many types of mortgages, including both original purchases and refinances. You also can get a fixed loan or an adjustable loan.
You can also use this loan to buy more expensive homes. In much of the country today, the maximum FHA home loan is $424,000. For more expensive areas, the maximum is $625,000. FHA recently increased the maximum loan amount; this suggests that the US economy is expanding and home prices are rising.
#3 You Can Put Down Less
When the mortgage market crashed a decade ago, 100% financing loans virtually disappeared. But do not worry about putting down 20%; you can get an FHA loan in many cases with only 3.5% down. You will need to have a credit score of at least 640 usually to get that low of a down payment but it is possible.
Being able to buy a home with just 3.5% down opens up home ownership to millions more American families. The low down payment option is one of the most popular aspects of the FHA program.
#4 You Don’t Need Great Credit
Many people can’t get a conventional loan at a good rate because they have damaged credit. FHA loan underwriters are more forgiving. This is because the loan is guaranteed by the government, so the lender is more willing to lower lending criteria.
If you have at least a 620 credit score, you can often get a 3.5% or 5% down payment mortgage. If you have a score under 620, you may need to put down 10%.
But you are not usually totally out of the home buying game with an FHA home mortgage with poor credit. You can even get an FHA loan if you have a recent bankruptcy or foreclosure on your record. You will probably have to wait at least a year from a foreclosure, but you still should be able to get an FHA home loan in many cases.
#5 Loan May Cover Remodel
If you want to buy an older home that needs work, you can get an FHA 203k loan. This product will cover the cost of some repairs and renovations. The cost of some of the repairs will be built into the loan. This can make a huge difference if you do not have the cash on hand to fix the house after you put down money to buy the home.
The 203k program is very popular because it allows you to borrow renovation funds at a very low rate and pay them over the life of the loan. You will never be able to borrow repair funds at a lower rate than an FHA loan.
#6 You Can Get Closing Cost Help
When you buy your home, you will need to pay closing costs of 3% to 5%. This is used to cover loan origination costs, attorney fees and appraisal fees. But an FHA mortgage will allow you to have the seller pay part of the closing costs if they agree to do so.
If the seller is having trouble getting a buyer, he may offer to help you with closing costs to get the deal done.
#7 FHA Home Loan Rates Are Low
Remember, the FHA loan is guaranteed by the government. Thus, the lender is usually willing to offer you a low interest rate. Sometimes, the rate could be lower than the rate for a conventional mortgage.
You will have to pay private mortgage insurance but you still may have a payment that is lower than what you are paying for rent.
#8 PMI on Conventional Loan Is Sometimes Cheaper
The only major downside of an FHA home loan is that you have to pay for mortgage insurance. In the last few years, the US government increased the mortgage insurance percentage to help to keep the program solvent. These increases can make an FHA loan more expensive than a conventional loan.
You now need to pay an upfront premium of 1.75% and an annual premium of 1.35% of the total loan amount. If you are getting a 30 year, $200,000 loan, this could amount to $3500 in costs up front and $2700 per year to pay for insurance.
You might be better off in some loans with a conventional mortgage, although the increased cost of an FHA loan is offset by having to put down only 3.5%.
The Bottom Line
FHA home loans are a great option because you can qualify for a loan with only 3.5% down, enjoy a low interest rate, and flexible lending criteria.
These loans are fairly easy to qualify for, and they make it much easier for millions of buyers to get a home of their own.
Regarding mortgage insurance, you can use an FHA home loan to buy the home at first. After you get 20% equity in the home, you can refinance out of it into a lower cost, conventional loan.