FHA Mortgage Types

Highlights

  • The FHA insures both fixed- and floating-rate loans
  • Get a FHA rehabilitation loan for distressed properties.
3.7
/5.0
(7 Votes)

Learn the Strengths and Weaknesses of FHA Mortgages, and What the FHA Offers Today.

Editor’s note: FHA Mortgage Insurance Premium Changes starting April 9, 2012 and June 11, 2012. There is good news and bad news regarding the FHA MIP (Mortgage Insurance Premium) rates depending on the type of loan you are taking:

  1. Streamline Refinance Loan: The good news is that the mortgage insurance for FHA Streamline Refinance loans is decreasing starting June 11, 2012. The Up-front Mortgage Insurance Premium (UFMIP) rate decreases to 0.01%, instead of 1%. The annual MIP will be set at 55 bps instead of 115 bps, regardless of the loan amount. That means a savings of $50 per month for every $100,000. This decrease is only available to borrowers whose current FHA loan was delivered to the FHA prior to June 1, 2009.
  2. Single Family Mortgage Loan: The bad news, which will affect new home purchasers and refinancers with a non-FHA loan, is that the rates, starting April 9 2012 are increasing. The UFMIP increases to 1.75% instead of 1%. The annual MIP will increase by 10 bps.(That means an additional $8.33 per month for every $100,000). The increase in the rates was a result of the Temporary Payroll Tax Cut Continuation Act of 2011 signed by President Obama on Dec. 23, 2011.

Purchasing a home with an Federal Housing Administration-insured mortgage provides many benefits to a homebuyer. One of the biggest is the low down payment that is required for an FHA loan. When purchasing a home FHA allows for first time homebuyers to have a down payment as low as 3.5%. Furthermore, it is easier for a borrower to qualify for a loan that is insured by FHA. For instance, the credit qualifying restrictions are less stringent in an FHA loan than in a conventional loan. This makes an FHA loan the best option for a borrower with less than stellar credit.  FHA loans also come at competitive rates.

FHA loans have been in a process of change for the past several years. These changes have made some consumers skeptical, but there really is not much to fear. In fact, an FHA loan today resembles most other mortgage products, but has a few advantages others lack. If you want to find out if an FHA loan is right for you, you must look at the facts.

Similarities of FHA Loans Today

  • Minimum Credit Scores: Like any other loan, FHA loans now require a minimum credit score.
  • Loan Lengths: FHA loans carry the same term or loan length as conventional fixed rate mortgages.
  • Documentation: New standards on documentation required for regular mortgages also apply for FHA loans. Expect to be asked to show all your financial documents, regardless of the type of mortgage you are looking for.

Differences of FHA Loans Today

  • Small Down Payment: Generally speaking, FHA loans require a 3.5% down payment, which is smaller than other mortgages. This can be a huge advantage to those without much cash on hand, but who have sufficient income to comfortably make the monthly housing payment.
  • Lower Credit Score: While a minimum credit score is required for an FHA loan nowadays, the requirement is still much lower than for a conventional loan. The FICO number is set at 580, with two years of credit history. Those who are seriously considering owning a home should already have a higher score than this.
  • More Options: FHA loans offer refinancing options for underwater mortgage holders (those who owe more than their home is worth) who have continued to stay current on their loans. Sourcing these different mortgage products may be the solution you have been looking for.

203(k) Rehabilitation Loan

Buyers of distressed properties may qualify for a rehabilitation loan that includes both the mortgage and the repair costs. The application must include a detailed proposal showing the scope of the work, and a detailed cost estimate for each repair. The appraisal estimates the value of the home after the repairs, rather than the current value.

The required down payment is 3.5% of the total loan, not 3.5% of the current value. The loan then covers the purchase cost, closing costs, and remodeling costs, plus a 10-20% reserve for additional repairs added later or cost overruns. Funds are paid into an escrow account, which is then used to pay the contractor and includes a 10% holdback. Payments on the loan begin immediately after the purchase is complete. Because a borrower may not be able to occupy the home until after the repairs are completed, it is possible to include up to six months of principal and interest payments on the new loan into the total loan amount.

Non-Occupying Co-Borrower on FHA Loans

FHA loans allow as a co-borrower someone who is not going to reside in the home. The FHA program is far more liberal in this circumstance than conventional loan programs. In general, the non-occupying co-borrower is a close relative of the borrower. The non-occupying co-borrower needs to meet certain income and credit qualifications.

There are other types of FHA loans, aside from purchase loans. FHA loans are available for refinance and if someone already has an FHA loan, the FHA streamline refinance can be a simple and quick way to lower one's interest rate at a low cost. An FHA streamline refinance does not require an appraisal, for instance.

Summary

The FHA loan programs are ideal for someone who has less than perfect credit, whose credit issues do not allow him/her to qualify for a low-rate conventional loan. Even a bankruptcy that was discharged two years ago does not preclude a borrower from qualifying for a FHA loan. FHA purchase loans require a low down payment, whereas the days where conventional loans allowed a purchase with little or no money down are gone.

3.7
/5.0
(7 Votes)
13 Comments
Recent Best
1500 characters remaining
  • RM
    Mar, 2012
    Rocio
    Wasco, CA
    Hello I purchased my home back right before the housing market took a dive. I am now trying to get help with refinancing I don't want to short-sale but my house is not worth the amount of my mortagae my loan servicer is Ocwen and am not sure if I have to deal directly with them to apply for a short refinance that obama just rolled out. I checked the Fannie May Freddi Mac website and our address does not appear. I know all of our paper work was with WMC orginally but as stated Ocwen is our loan servicer. Where should I start don't want to miss out of a program it there is one available we qualify for. Please advise.
    0 Votes

    • BA
      Mar, 2012
      Bill
      Rocio, you asked your question on one of our FHA pages. Is your loan an FHA loan? If it is, look into an FHA streamline. It does not need to be done with your current lender or servicer.

      If it is not an FHA loan or backed by Fannie or Freddie, there is not currently a program for financing an underwater home.
      0 Votes

  • PA
    Jun, 2011
    Paola
    Adelanto, CA
    Hi; I have a FHA loan mortgage. I am up to date with my payments, never been late. But I have realized that my property value has dropped so much, that I own more than the house is worth. Right now I owe $160,000 and the value of the house should be about $110-120,000. What should I do? I don't want to keep paying and throwing my money away. I'd rather sell it and buy another house but I don't have the $40 or 50,000 to pay back the bank. Is there any way to help my situation. Thank you very much.
    0 Votes

    • BA
      Jun, 2011
      Bill
      Your options are limited. If you had a non-FHA loan you could apply for an FHA Short Refinance. You can still try this option, but with a non-FHA lender. Your other option is a short sale, or allow foreclosure.
      0 Votes

  • MR
    Apr, 2011
    Mary
    Saginaw, TX
    My sister is trying to get a loan to buy my mothers home who passed away last year. Before her death she had a reversal mortgage loan, my sister credit was at 580 and is at 607 now. We can not find anyone one to help with the loan because they want her credit score at 620. We are pressed for time now, my mother home will be posted for sale, by the courts since she left no will. What can we do to get a loan to assist in not loosing our family home
    0 Votes

    • BA
      Apr, 2011
      Bill
      Read the Bills.com resource Rapid Rescoring to learn of a possible solution to your sister's problem.
      0 Votes

    • TM
      Oct, 2011
      Tena
      Tracy, MO
      I found a house for $49900.00 in a small town where i would feel at home. My payments should be less than $300.00 a month. I am paying rent at $575.00 have opened two active lines of credit to up my credit score so I can buy this house and lower my payments. I work full time and go to college full time. I need a loan to drop my rent my one credit score is at a 598. I am afraid that someone will get the house before me. Please help. Tena Mitchell
      0 Votes

    • BA
      Oct, 2011
      Bill
      Speak with a loan officer whose firm offers FHA loans. You also want to find a loan officer that is familiar with the rapid rescore options that may help you raise your score speedily, in case you need to do so in order to buy the house you want before someone else does.
      0 Votes

  • MF
    Apr, 2011
    Mary
    Highland, CA
    I have the opportunity to refinance my 10 yr. ARM that expires in 2015 into a fixed 30 yr FHA loan, but FHA requires that I put $120,000 down to meet the 97% of what the home is worth. I have the money to do this but it is more than half of my nest egg. I am 56 and a widow. Should I take the loan or should I wait and hope house prices go up. I live in California. Thanks!
    0 Votes

    • BA
      Apr, 2011
      Bill
      Answering your question is difficult without knowing more about your financial situation. You need to look at the overall cost of both the ARM and the refinanced loan. Consult with a financial planner, who will review your overall financial picture and work with you to create a financial plan that involves your savings, investments, insurance, and housing.
      0 Votes

    • BA
      Apr, 2011
      Bill
      Consult with a financial planner who will take a more holistic look at your financial situation when answering your refinance question. You need to look at your overall saving, investments, and the overall cost of refinancing the mortgage. Your best deal may be to stand pat. However, it is impossible to say so without looking at your complete picture.
      0 Votes

  • SL
    Apr, 2011
    Shaunna
    Millbury, MA
    If I use a co-borrower(close relative who will not be residing) on an FHA 203K Loan, when I refinance in 6 or greater months can I remove thier name if I have then been current with my job for 2+ years and meet the income guidlines?
    0 Votes

    • BA
      Apr, 2011
      Bill
      The difficulty in answering your question is the mortgage market is in turmoil, and the FHA is changing its lending requirements month by month. Even if the answer to your question about your 203(k) loan is yes" today (and I am not certain it is), it may not be yes later this year. Consult with your loan officer about current requirements for a streamline refinance, given your circumstances.
      1 Votes

loading...