An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, or FHA for short. Popular with first-time homebuyers, FHA home loans require lower minimum credit scores and down payments than many conventional loans. Although the government insures the loans, they are offered by FHA-approved mortgage lenders.
FHA loans come in fixed-rate terms of 15 and 30 years.
FHA’s flexible underwriting standards allow borrowers who may not have pristine credit or high incomes and cash savings the opportunity to become homeowners. But there’s a catch: borrowers must pay FHA mortgage insurance. This coverage protects the lender from a loss if you default on the loan. Mortgage insurance is required on most loans when borrowers put down less than 20 percent. All FHA loans require the borrower to pay two mortgage insurance premiums:
So, if you borrow $150,000, your upfront mortgage insurance premium would be $2,625 and your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25 per month), depending on the term.
FHA mortgage insurance premiums cannot be canceled in most instances. The only way to get rid of the premiums is to refinance into a non-FHA loan or to sell your home. FHA loans tend to be popular with first-time homebuyers, as well as those with low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as they use it to buy a primary residence.
FHA lenders are limited to charging no more than 3 percent to 5 percent of the loan amount in closing costs. The FHA allows home sellers, builders and lenders to pay up to 6 percent of the borrower’s closing costs, such as fees for an appraisal, credit report or title search.
To be eligible for an FHA loan, borrowers must meet the following lending guidelines:
Unlike FHA loans, conventional loans are not insured by the government. Qualifying for a conventional mortgage requires a higher credit score, solid income and a down payment of at least 3 percent for certain loan programs. Here’s a side-by-side comparison of the two types of loans.
While there are many differences between FHA and Conventional Mortgages, a number of the most significant are;
FHA credit scores requirements are much lower than Conventional
Cash down payment can be as low as 3% for conv. financing, with a minimum credit score of 620.
FHA down payment is3 1/2% with a minimum credit score of 580. FHA will consider a score as low as 500 to 579 but requires a down
payment of as much as 10%
Both types of financing require mortgage insurance. FAH requires an upfront premium of 1.75% of the loan amount and an annual
FHA premium of 0.45% to 1.05%
Finding the mortgage that is right for you is one of the most important components of purchasing a new home. It is also one of the most complicated and sometimes confusing.
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