What to Know About FHA Loans

Posted by Steph Kaye on Monday, March 10th, 2014 at 1:35pm.


If you thought that becoming a homeowner might not be possible for you right now because of your income or you don't have enough money for a down payment, you may be wrong.   Coming up with a Down payment to purchase a home can be difficult. Most banks require at least 10% down, and if you are trying to buy after a difficult situation, such as a divorce, coming up with that amount can be impossible. Banks have tightened up, so getting a loan is harder than it has ever been. So,look into getting an FHA loan. They are widely available, and should not be overlooked by anyone thinking about buying a home.

An FHA loan is a loan that is backed by the government agency known as the Federal Housing Administration (FHA). While the FHA does not actually issue the funds for the loan, they do provide insurance on the loan in case the borrower defaults. With the insurance that the FHA provides, lenders are able to lend funds to borrowers that are considered “risky.” If these borrowers fail to make their payments, the lender is still covered by the FHA. To obtain an FHA loan, you are usually only required to put 3% down. The down payment can be gifted to the borrower, which makes it even easier to obtain an FHA loan. If you need assistance with the down payment there are many non-profit and public charity organizations that can help you. It is pretty easy to get gift funding for any loan amount. The maximum loan amount is determined by the federal government. The general loan amount is per state/county and can be found on the federal housing authority website. 

Not everyone can qualify for an FHA loan. In order to qualify for this program, you must be a U.S. resident and have a 2-years or more of steady employment history. Also, your total monthly housing costs must be less than 31% of your pre-tax income. Monthly housing costs not only include the principal and interest payments on your mortgage, but also mortgage insurance, property taxes and home insurance costs. Those costs combined with all other debt payments that you have cannot total more than 43% of your gross monthly income.

While the FHA loan program is often considered to be a program for borrowers with low credit scores, they typically need to have a credit score of at least 640 to be approved by most lenders. If you have a poor credit score, but can provide a larger down payment you may still be able to qualify. If you have underwent bankruptcy or foreclosed on a property, you can still qualify for the program if it has been more than two and three years. In terms of a down payment, you will also have to be able to put at 3.5% of the purchase price of the home down. In order to avoid mortgage insurance, you will have to pay at least 5%.

 Mortgages for buyers with low down payments keeps getting more expensive and less attractive as more buyers question whether it's still worth getting an FHA loan. It used to be that the purpose of FHA loans was to help low-income buyers afford homes. During the subprime boom from 2003 to 2007, less than 10% of the purchase loans being originated each year were backed by the FHA.  After the financial crisis of 2008, when mortgage standards tightened, more borrowers and lenders turned to these loans, because they were easier to get. About 40% of purchase loans by the end of 2009 were backed by the FHA, according to the U.S. Department of Housing and Urban Development's latest annual report to Congress. It dropped to about 26%  at the end of last fiscal year.

FHA borrowers are charged an annual mortgage insurance premium of up to 1.35 % of the average outstanding money owed on their loans. The fee is added to the borrower's monthly mortgage payment. The FHA also charges a 1.75% upfront fee when the borrower gets the loan.  A borrower getting a $200,000 loan, after making a 3.5% down payment, pays $225 per month in FHA mortgage insurance, plus an upfront fee of $3,500. Say you keep that mortgage for 10 years before you sell or refinance , it then adds up to about $30,000 in mortgage insurance fees. That is significantly more than what a borrower would pay for private mortgage insurance on a conventional loan, which doesn't have an upfront fee. The mortgage insurance premium on a conventional mortgage can be less than half of FHA's insurance, depending on the borrower's credit. A conventional loan is almost always cheaper than an FHA.

Homebuyers normally go for FHA loans because they don't have enough money saved for the 5% minimum down payment that most conventional loans require. But even those homeowners should explore their opportunities, including down payment assistance programs. There are various programs offered by states' housing finance agencies and city or county agencies. People tend to think they make too much money to qualify, but many of these programs are also available to moderate-income families. And if you find a lender willing to offer conventional loans with less than 5% down, mortgage insurance shouldn't be an issue because some mortgage insurance companies are willing to insure loans with as little as 3% down. If you are planning on purchasing a home, it is best to explore all of your loan options – both FHA and conventional – to determine which option makes the most sense for you. 

If you would like information on homes for sale, or are first time home buyer not working with a Realtor and would like to schedule a consultation with a qualified Oakland County and Macomb County Realtor, please complete the Lang Premier Properties contact form to have a real estate agent contact you. 

Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang.  Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate.


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