FHA home loans are insured by the Federal Housing Administration (FHA), and can only be provided by lenders approved by the FHA. This type of mortgage has a fixed term length of either 15 or 30 years. It’s a popular choice among first-time homebuyers with limited savings or lower credit scores.
When purchasing a home, you might be responsible for certain out-of-pocket expenses like loan origination fees, appraisal costs, and attorney fees. One of the advantages of an FHA home loan is that the seller, home builder, or lender can cover some of these closing costs on your behalf.
The minimum down payment (3.5%) and credit score requirements (at least 580) of FHA loans are lower than that of many conventional loans. And unlike conventional mortgages, 100% of your down payment can be a gift. This gift can come from any of the following:
– The borrower’s relative.
– An employer or labor union.
– A close friend.
– A charitable organization.
– A governmental agency or public entity that has a program providing home ownership assistance.
If your credit score is between 500 and 579, you still can qualify for this kind of loan; however, you’ll have to make a larger down payment.
Generally speaking, the lower your credit score and down payment, the higher the interest rate you’ll pay on the mortgage.
Different Types of FHA Loans
Used to finance primary residences.
Home Equity Conversion
(reverse mortgage) Allows homeowners 62 years of age and older to exchange their home equity for cash while still retaining title to the home. Funds can either be withdrawn as a fixed monthly amount or as a line of credit.
Includes extra funds to pay for repairs and renovations to the Los Angeles house. For this type of loan, the property may undergo two separate appraisals: an “as is” appraisal that evaluates its current state, and an “after improved” appraisal estimating the value after the work/renovations are finished.
Energy Efficient Program
Includes extra funds to pay for energy-efficient home improvements (could potentially lower the cost of your utility bills).
A graduated payment mortgage (GPM) with reduced initial monthly payments that increase over time, and a growing equity mortgage (GEM) where fixed increases in monthly principal payments result in shorter loan terms. This program is for borrowers who anticipate an increase in income.
Mortgage Insurance Premiums
As of 2020, the UFMIP is equal to 1.75% of the base loan amount. It can either be rolled into the loan or paid at the time of closing. As for Annual MIP, your monthly payments will range from 0.45% to 1.05% of the base loan amount, depending on factors such as length of the loan, the base amount, and the original loan-to-value ratio (LTV).
If you start with a down payment of less than 10%, you’ll continue to pay mortgage insurance for the duration of the loan. Those with 10% down payments will pay FHA mortgage insurance for 11 years.
Advantages of FHA
The DTI and credit score requirements are more relaxed than those of other loan types
Lower down payments
Increased allowance for closing cost financing
Good for first-time homebuyers
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