The Facts About FHA – Is it Really the Best Loan For You?

The Facts About FHA – Is it Really the Best Loan For You?

In the wake of the sub chief lending collapse we’ve heard a lot of buzz about FHA loans, but most people are unaware of how these loans differ from traditional financing, or if an FHA loan might be right for them.

The Federal Housing Administration (FHA) was produced in 1934 to help more people access the housing market. Prior to this, home loans needed large down payments, and were short term requiring re-payment in as little as five years. The FHA stepped-in to insure lenders against foreclosure loss on residential mortgages that are underwritten according to their guidelines. This has resulted in lenders offering low down payments, long-term financing, and amortization payment options with the knowledge that their loan is protected.

Today, FHA is the largest insurer of mortgages in the world, and here are some of the reasons the program has become so poplar in today’s market:

• High loan-to-value ratios are permissible. FHA loans for buy or refinance with no cash out can go up to 97%, and up to 85% with cash out.

• For purchases, up to 100% of the buy price can be covered by the loan and a down payment assistance program. Up to 6% can be contributed on a buy, by parents or a friend, or multiple people.

• A non-occupant can be a co-borrower.

• Although most lenders have a minimum FICO threshold of 620, some FHA lenders will go down as low as 530.

• Rates are competitive with traditional Fannie Mae loans, and often much better at the higher loan-to-value ratios.

• There are no pre-payment penalties.

• No reserves are required.

Many of these features remind us of some of the good things about sub-chief loans, but that’s where the similarity ends. FHA loans also have some tough requirements:

• All income must be fully proven and the debt-to-income (DTI) ratios are fairly tight. Also, no accounts can be paid-off by the loan to lower the DTI.

• Monthly Mortgage Insurance (MMI) is paid every month in addition to an up-front Mortgage Insurance Premium (MIP) at the time of closing. The up-front premium is 1.50% of the loan amount and can be financed into the loan by increasing the loan amount. The monthly premium equals the amount of the loan multiplied by .50% and divided by 12.

• Mortgage insurance is paid monthly until the loan-to-value ratio is 78%, based on the value of the home at the time the loan is closed. consequently, it lasts until the loan is truly paid down to 78% of value. If the loan amount is below 78% LTV, the MI must be paid for 5 years.

• Owner occupied homes only.

FHA insured loans are an excellent resource for those that are looking to buy and don’t have a big down payment, or for those refinancing with lower credit scores and high loan-to-value ratios. For someone looking to take advantage of the current buyer’s market, FHA can be a great way to buy a first home. basically, the mortgage insurance roles like a second mortgage, allowing one to buy with very little cash. however, the Mortgage Insurance is a big draw-back if your loan amount is below 80% and your credit is decent.

The bottom line: Finding the loan that is right for you involves more than shopping for a low interest rate and should be based on a careful evaluation of your overall financial situation and goals. To learn more please visit us at []

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