FHA Home Loans

FHA Loans: Everything You Need to Know

A mortgage that is insured by the Federal Housing Association and is meant for buyers with limited savings or low credit scores are called FHA Loans. The great thing about them is that they come with a low down payment for those buyers who have a credit score of at least 580. 

If a buyer’s credit score is less than 580 and up to 500, they are still eligible for the loan provided that they make a 10% down payment. The minimum down payment is 3.5% and works well for first-time buyers.

How are FHA Loans Issued

The loan is issued by financial institutions such as banks, non-banks, and credit companies. These financial institutions are insured by the FHA itself and are governed by the rules set by it. Buyers who have low to moderate-level income can pay it from either a grant meant especially for this purpose, a gift from family or from their savings. The intermediaries that provide the loan are responsible for evaluating the buyer and making sure they qualify for the loan. 

FHA Loans are an excellent way to secure property, however, some rules may apply. These rules are not found in conventional mortgage schemes and the risk of the lender is low. In case a buyer defaults, FHA pays the lender institution a claim on behalf of them. 

History of Federal Housing Association

FHA came into being in 1965, officially. It was formed because thirty years prior to its existence, the great depression hit the US and around half of the homeowners defaulted on their mortgages. To make ownership of a house more accessible to the general public, the National Housing Act of 1934 was passed and later FHA was made part of it. 

If you’re opting for an FHA Loan to finance buying a property, you will be required to pay two types of mortgage insurance premiums. The first is a one-time Upfront Mortgage Insurance Premium (UFMIP) used by the FHA to insure the loan for borrowers and provide protection to the lending party. The premium is 1.75% of the base loan and is collected into an escrow account.
The second mortgage premium is a monthly fee that amounts to an Annual MIP and ranges from 0.45% to 1.05% of the base loan. The percentage depends on the duration of your loan and the total amount borrowed.

Types of FHA Loans

The FHA loans vary to cater to different needs. The traditional FHA loan is used to finance first-time homes or primary residences. A section 245 (a) Loan is for those who want to pay less at the start and gradually increase the amount of monthly payment they make which results in a shorter loan term. 

Energy Efficient homes have become quite popular and the FHA allows for two loans that finance such homes. The 203(k) Mortgage program and the Energy Efficient Mortgage program both include additional funds to pay for an energy-efficient residence. The difference between both of them is that one allows an upgrade that eventually lowers your utility bills while the other lets you borrow money for the same purpose and includes it in the cost. 

The last FHA Loan is the Home Equity Conversion Mortgage that allows seniors who are 62 or above to change the equity of their house to cash and retain the ownership of the property. 

Regardless of the loan that you decide to apply for, you should ideally compare the requirements of different lenders as they can vary. Even though FHA loans are a convenient way to buy your first house, there are some cons that you need to look out for and work your way through.