The Federal Housing Administration (FHA) is part of the United States Department of Housing and Urban Development (HUD) and is the largest government insurer of mortgages in the world. Since its inception in 1934, FHA has insured over 34 million properties by providing mortgage insurance on single-family, multifamily, manufactured homes and hospital loans made by FHA-approved lenders.
The FHA does not actually make home loans. It guarantees lenders will be repaid if you default on the loan. The mortgage insurance provided by FHA pays the lender in case of default. Borrowers must qualify and meet lender requirements but the lender bears less risk because FHA insures the mortgage loan. There are many benefits and protections that come with FHA loans but there are drawbacks too.
FHA loans require low down payments and typically have less strict underwriting standards than conventional loans. But they now require mortgage insurance for the life of the loan. This requirement can make FHA loans more expensive than conventional mortgage loans.
For a 30-year loan with a down payment of less than 5%, your premiums will be 0.85% of the outstanding balance each year. That cost is typically divided into 12 monthly payments and added to your mortgage payment. That’s $850 per year, or about $70 per month, per $100,000 of loan balance. If you put more than 5% down on a 30-year loan, your annual premiums will be 0.80%.
If you keep your FHA financing for 30 years, you’ll pay significantly more in mortgage insurance premiums than you would with a conventional loan and private mortgage insurance. However, the benefits of FHA-backed mortgage loans still outweigh the drawbacks. For many first-time homebuyers, FHA is the way to go.
Home Buyer Benefits to FHA Mortgage Loans
Poor Credit Okay
The FHA credit score requirements for 2015 continues to make FHA loans easier to obtain than regular conventional loans. FHA loans have flexible income, debt, and credit requirements to help borrowers qualify. FHA can help a consumer qualify with less than perfect credit. Unlike conventional loans, FHA views a consumer’s credit history with reasonable credit underwriting and does not solely rely upon credit scoring.
For borrowers whose credit scores are between 500 and 579 a maximum LTV of 90% applies which means borrowers in this category must have a 10% downpayment. Borrowers with credit scores 580 or above are eligible for maximum financing which means a 3.5% downpayment is required. Many participating FHA lenders require a credit score of at least 620 in order to qualify. Lenders have the autonomy to set their own credit score requirements even though participating in the FHA program. Get quick tips to raise your credit score if it is below 620.
Low Down Payment
FHA requires a 3.5% downpayment which can be funded by a gift from a family member, employer, charitable organization or grant. Available on 1-4 unit properties. Every State has some kind of down payment assistance program, find one in your State.
Competitive Interest Rates
Because FHA loans are insured by the government, lenders can offer some of the best interest rates.
The requirements for loan qualification are often easier than conventional mortgage loan qualification because lenders have the assurance that mortgages are backed by the government.
Good Neighbor Next Door Sales Program
HUD offers a substantial incentive in the form of a discount of 50% from the list price of a home in HUD designated revitalization areas. In return you must commit to live in the property for 36 months as your sole residence. In order to qualify you must be one of the following:
- Law enforcement officer
- Pre-K through 12th grade teacher
- Emergency medical technician
Manufactured and Mobile Homes
FHA has two different loans for manufactured and mobile homes, one for borrowers who own the land and the other for mobile homes located in mobile home parks. Get more information from HUD.
Funds for Fixer-Uppers, Repair and Remodeling
HUD’s 203(k) program can help you purchase or refinance a property and include in the loan the cost of repairs and home improvement. You can also refinance your existing home with FHA and include the costs of remodeling in the new loan. Visit HUD’s 203(k) program for more details.
Reverse Mortgage Plans for Seniors
FHA’s reverse mortgage program allows seniors to convert their built up equity to cash and repayment is only required when the senior no longer uses the home as their principal residence. Reverse mortgages are increasing in popularity with seniors, it is a way to supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender
See HUD’s reverse mortgage.
Other Uses of FHA Loans
Loans can be used to make your home more energy efficient. FHA’s Energy Efficient Mortgage program is for homebuyers as well as existing homeowners. Learn more.
Help to avoid Foreclosure
FHA insured loans have many options to help you avoid foreclosure and keep you in your home. One program is partial claim. Under the partial claim program your lender can obtain a one-time payment from FHA-Insurance fund to bring your mortgage current. FHA will advance the defaulted amount on behalf of the borrower to the lender. Read more
FHA mortgage loan limits vary by State and Counties, with larger loan amounts allowed in areas with higher housing costs. To better understand how the limits are set, see MORTGAGEE LETTER 2014-25 from HUD dated December 5, 2014.
Maximum FHA loan limit amounts (the “floor”) by property size for 2015 are as follows:
Any area where the loan limits may exceed the floor is known as a high cost area (the “ceiling”) and the loan limits are as follows:
There are special exceptions for the high cost areas of Alaska, Hawaii, Guam and the Virgin Islands. The mortgage loan limits can be adjusted up above the “national ceiling of $729,500.” The limits are as follows:
The information above is not guaranteed as the current economic challenges have created a need for FHA to regularly adjust and update mortgage loan limits. The most accurate information can be found at https://entp.hud.gov/idapp/html/hicostlook.cfm for your specific State and County.