FHA Mortgages: What They Are
Congress created the Federal Housing Administration (FHA) in 1934, and it became a part of the Department of Housing and Urban Development (HUD) in 1965. FHA is the only government agency that costs the taxpayers nothing and gets all of its income from its own operations. Mortgage insurance premiums paid by borrowers are used to fund the program. FHA's purpose is to stimulate the housing market and open up home ownership to more people.
FHA Mortgages: Advantages
- Low Down Payment: FHA mortgages require a down payment of just 3.5%, and you can get it from family members, charitable organizations, or local government agencies. Refinancing an FHA mortgage requires very little equity as well. You can even do a cash-out refinance to 85% of the home's value
- Finance Closing Costs: FHA allows you to finance (roll into the mortgage) many of the loan's closing costs, including the upfront mortgage insurance premium (MIP). This means you don't have to come up with a lot of cash for closing costs out of pocket
- Fixer-uppers Okay: You can finance the purchase and rehabilitation of a fixer-upper with an FHA 203(k) loan. This mortgage allows you to determine what repairs or renovations cost and get a single loan for the home's purchase and repairs
- Manufactured Homes and Condos Okay. FHA mortgages can be used to finance condominiums and even manufactured homes. There are no additional charges or interest rate add-ons
- Flexible Underwriting: FHA mortgages can be available to those with little credit history or past credit problems like foreclosures (three years prior) and bankruptcies (one-to-two years prior) Debt-to-income ratios may be stretched when applicants can demonstrate responsible financial management by establishing savings and paying bills on time
- No Risk-based Price Adjustments: Unlike conventional mortgage lenders, FHA lenders don't impose extra surcharges for cash-out refinancing, low
down payments or equity, low credit scores, condominiums, mobile homes, or homes in declining real estate markets
FHA Mortgages: Trade Offs
- Loan Amount Limitations: You can't buy a mansion with an FHA home loan. Your maximum mortgage size depends on where the property is located and is determined by property values in that area. Check HUD's Web site for FHA loan limits in your area
- Mortgage Insurance Premiums: FHA mortgages require that all borrowers pay an upfront mortgage insurance premium (in most cases it's 1.75% of your loan amount). In addition, all FHA mortgages come with annual insurance premiums of about 0.5%. This amount is divided by twelve and added to your monthly mortgage payment
- Rigorous Income Documentation Requirements. Only stable and documented income is considered for mortgage eligibility. Lenders generally like to see two years of steady employment in the same line of work prior to the mortgage application. Income from part-time jobs won't be counted unless it has been uninterrupted for at least two years. In addition, self-employed or commissioned employees need at least a two year history of successful earnings to have their income used for qualifying
FHA Mortgages: Who Is Eligible?
- You must have a valid Social Security Number
- You must be a legal resident of the United States (but citizenship is not required)
- You must be of legal age to obtain a mortgage in your state
FHA mortgages should be originated by FHA-approved lenders. When shopping for your mortgage. make sure that the lender you select is on HUD's list of approved FHA mortgage lenders. which can be found on HUD's Web site. FHA mortgage interest rates are not set by the government; you need to shop for your best deal the same way you would for any other home loan.