Common Questions About an FHA-insured Loan
Why choose an FHA-insured loan?There are lots of good reasons to choose an FHA-insured loan, especially if one or more of the following apply to you:
- You're a first-time homebuyer.
- You don't have a lot of money to put down on a house.
- You want to keep your monthly payments as low as possible.
- You're worried about your monthly payments going up.
- You're worried about qualifying for a loan.
- You don't have perfect credit.
If any of these things describe you, then an FHA-insured loan may be right for you. Why? FHA-insured loans offer many benefits and a level of security that you won't find in other loans including:
Low cost: FHA-insured loans have competitive interest rates because the federal government insures the loans for lenders.
Smaller downpayment: FHA-insured loans have a low 3% downpayment and the money can come from a family member, employer or charitable organization as a gift.
Easier qualification: Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify.
Less than perfect credit: You don't have to have perfect credit to get an FHA-insured mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA-insured loan than a conventional loan.
More protection to keep your home: The FHA has been helping people since 1934. Should you encounter hard times after buying your home, the FHA has many options to keep you in your home and avoid foreclosure.
FHA insures loans for lenders against defaults - it does not lend money or set interest rates. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. An FHA-approved lender can help you start the loan application process.
You may use an FHA-insured mortgage to purchase or refinance a new or existing 1- to 4-unit home, a condominium or a manufactured or mobile home (provided it is on a permanent foundation).
What kinds of insured loans does FHA offer?
Fixed-rate loans - Most FHA-insured loans are fixed-rate mortgages (loans). The advantage of a fixed-rate mortgage is that your interest rate stays the same during the loan period, so you know exactly how much your monthly payment will be.
Adjustable rate loans - Most first-time homebuyers are a little stretched financially. With FHA's adjustable rate mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. FHA uses the 1-Year Constant Maturity Treasury Index (CMT) to calculate the changes in interest rates. An index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time.
The maximum amount that the interest rate on your loan may increase or decrease in any one year is 1 or 2 percentage points, depending upon the type of ARM you choose. Over the life of the loan, the maximum interest rate change is 5 or 6 percentage points from the initial rate. The advantage of selecting an ARM is that you may be able to expand your house-hunting value range because your initial interest rate will be low, as will your payment. Click for a more in-depth explanation…
Purchase/rehabilitation loans - Sometimes you might see a home you'd like to buy, but it needs a lot of work. FHA has a loan for rehabilitating and repairing single-family properties called the SF Rehabilitation Loan program (203k). You can get one loan which combines the mortgage and the cost of repairs. The mortgage amount is based on the projected value of the property with the work completed. The advantage of this loan is that you can buy a home that needs a lot of work, but have only one mortgage payment, and you can complete the repairs after buying the home.
Read more about these loans.
Indian Reservations and Other Restricted Lands - A family who purchases a home under this program can apply for financing through an FHA-approved lending institution such as a bank, savings and loan, or a mortgage company. To qualify, the borrower must meet standard FHA credit qualifications. An eligible borrower can receive approximately 97% financing and use a gift for the downpayment. Closing cost can be financed; covered by a gift, grant or secondary financing; or paid by the seller without reduction in value. More...
How do FHA-insured loans compare to subprime loans?
Subprime loans are loans designed for homebuyers who don't have a strong credit history or can't qualify for a regular or prime loan. Lenders charge a high interest rate on subprime loans because the risk that a homebuyer may not make their payments is high. Because FHA insures the lender against this risk, the interest rates on FHA-insured loans are generally among the lowest in the market. Most subprime loans carry interest rates at least 3 percentage points higher than an FHA-insured loan. On a $100,000 mortgage, the monthly payment for a subprime loan would be over $200 a month higher than an FHA-insured loan.
The majority of subprime loans are also ARMs, where the interest rate can change a lot and greatly increase your monthly payments. Most FHA-insured loans are fixed-rate loans where the mortgage payment always stays the same. If you have an FHA-insured ARM loan, the rate can't go up by more than one or two points in a year. The fees that lenders charge their borrowers for processing a subprime loan are also generally higher than on an FHA-insured loan.
Most subprime loans carry a heavy prepayment penalty that you must pay if you want to refinance your loan to a lower interest rate. These penalties can cost you hundreds or even thousands of dollars. There is never a prepayment penalty on an FHA-insured loan. You can refinance at any time and not worry about paying any penalties.
Unfortunately, because they don't know these facts, many homebuyers who could qualify to buy a home with a fixed-rate FHA-insured loan only apply for subprime loans. Check out an FHA-insured loan before settling for a subprime loan!
How do FHA-insured loans compare to conventional loans?
Conventional loans usually require a larger downpayment than FHA and if you have less than perfect credit you may not qualify for an affordable mortgage with a low interest rate . The best thing to do is compare the cost of the conventional loan to an FHA-insured loan line-by-line. What are the fees for each? What is the interest rate? How much is the mortgage insurance? How much downpayment is required? For some borrowers, a conventional loan may be less expensive. For many others, getting an FHA-insured loan is the way to go.
Do you have to buy mortgage insurance on an FHA-insured loan?
Yes - as you will with most loans. There is an up front mortgage insurance premium equal to 1.5% of the loan amount that is paid at settlement. In most cases, this mortgage insurance premium is included in your loan amount, so you are really paying it over the life of the loan. In addition, on loans with a term of greater than 15 years and a loan-to-value ratio of 90% or greater (meaning you are borrowing more than 90% of the value of the home), you will pay an annual mortgage insurance premium of 0.5% of the loan amount in monthly installments.
Example:
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Up Front Mortgage Insurance Premium
Mortgage amount: $100,000 X 1.5% = $1,500 @ 6.5% for 30 years = $ 9.48 per month |
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Annual Mortgage Insurance Premium
Mortgage amount: $100,000 X 0.5% = $ 500/12 months = $41.67 per month |
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Total Mortgage Insurance Premium $51.15 per month |
Most loans require mortgage insurance when your downpayment is less than 20% of the sales price. On conventional and subprime loans, mortgage insurance is provided by private companies. Whether private mortgage insurance is less than, equal to, or more than an FHA-insured loan’s insurance will depend upon the loan program and your qualifications.
Compare the cost of FHA to subprime and conventional types of loans over the life of your loan . Then compare how much each costs monthly. With the protection and value you get from FHA - it's a very good deal.
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