Federal Housing Authority (FHA) loan: An opportunity to secure a safer loan.
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The Federal Housing Authority (FHA) mortgage loan was established in 1934 to help stabilize the real estate market and help more families achieve home ownership. Changes in today's FHA reflect its original purpose: once again, real estate market turmoil is a top concern and FHA has stepped up with new products and guidelines to alleviate the problem.
Disadvantages: FHA mortgages require that the borrowers pay a mortgage insurance premium (MIP) of 1.5% up front, in addition to monthly charges equaling .500% per year. This is significantly higher than mortgage insurance charged on conventional mortgages, which with a 5% down payment is .500% per year. Borrowers who have the down payment, income, and credit to qualify for a conventional mortgage can save the additional 1.5% that FHA charges for mortgage insurance. In addition, FHA loans are not available in high loan amounts; the maximum allowed varies between counties and is determined by the median home price in that area.
Advantages: Home buyers who wish to take advantage of falling housing prices but face credit issues, have little cash for a down payment, or are limited by their income may be able to finance their home with an FHA loan. The chief advantages of an FHA loan for a home purchase are as follows:
- Low down payment requirement--as low as 3%, and it doesn't have to come from the borrower.
- Credit qualification is less stringent than for conventional loans. For example, borrowers with bankruptcies in their past are often required to wait several years before being granted a conventional home loan; FHA requires only a 2 year wait (and sometimes only 12 months with extenuating circumstances). And FHA has no minimum credit score requirement. The borrower's credit is evaluated case by case.
- FHA finances "fixer upper" purchases. The mortgage amount is based on what the property will be worth on completion of repairs or "rehabilitation." This is referred to as a SF Rehabilitation Loan Program 203(k).
- More generous income guidelines. Many lenders require a borrower's ratio of all payments including the mortgage, divided by gross income (this is called a back-end or bottom ratio) to be 36% or lower. FHA underwriting allows back end ratios of up to 45%.
- Higher loan-to-value (LTV) limits. For those whose property values are stagnant or those with loans that have negative amortization features, being able to refinance up to 98.75% of their home's value is an amazing benefit.
- Higher cash-out LTV limits. Many conventional lenders allow cash out mortgages at LTVs of 80-90%. FHA refinancing allows cash out up to an 85 or 95% LTV depending on borrower qualifications.
- FHA Streamline refinancing is easy. Homeowners who already have an FHA loan and want to refinance to a lower rate don't have to re-qualify for credit approval. And no appraisal is needed either. Streamline refinances are particularly advantageous for those whose credit ratings or home values have declined.