FHA Federal Housing Administration Loan Types For Real Estate Buyers
The FHA is an agency attached to the U.S. Department of Housing and Urban Development.
What exactly is an FHA Loan?
FHA Loans are mortgages insured by the Federal Housing Administration where the borrower pays for mortgage insurance so that the lender is protected from monetary loss if the borrower defaults on the loan.
As a result, lenders have the ability to offer these loans at attractive interest rates and allows them to be more flexible with some of their qualification requirements.
Does my credit score matter?
Absolutely. The minimum credit score for FHA Loans will depend directly on the type of loan a borrower needs. Typically anyone with a credit score under 500 will be ineligible for FHA Loans unless an exception is made under specific conditions for a borrower that might have Non-traditional Credit History or Insufficient Credit.
If a borrower has a score between 500 and 579, a cash down payment on the property in questions will need to be at least 10% of the contract value.
To qualify for a rate as low as 3.5%, the borrower will need a minimum credit score of 580 or higher. Then FHA borrowers can use any of their own savings to make the cash down payment on the property. If short on the amount, the only other allowed sources for cash on the down payment are “Gifts” from family members or a grant from the local state government down-payment assistance program.
Any Advantages of an FHA Loan?
Yes. The FHA allows home sellers, builders and lenders to pay for some of the borrower’s closing costs (i.e. appraisal, credit report, or title expenses).
This typically comes with a higher interest rate attached to the loan if they agree to pay the closing costs. It is good practice for borrowers to compare loan estimates from a few lenders to find out the best option.
Since the FHA is not considered a mortgage lender, but actually an insurer of the mortgage loan, a borrower should shop multiple Approved Lenders or Mortgage Brokers to find the best cost, service and underwriting standards for their situation.
Borrowers should also be aware that 2 mortgage insurance premiums are required on all FHA Loans.
- The Upfront Premium is 1.75% of the amount of the loan and is paid when a borrower receives the loan. It can be financed as part of the loan amount as well.
- The Annual Premium will vary depending on the duration of the loan, amount borrowed and the initial loan-to-value ratio. This is paid on a monthly basis.
What If I Want To Make Repairs?
Another major advantage to an FHA Loan is a special product offered called a 203(k) for borrows who will need extra cash to make repairs to the home. This product is based on the projected value of the home after repairs are made and not the initial appraisal value.