The Federal Housing Administration, commonly called FHA, is a government division which does not make loans, rather they are in the business of "insuring" your loan in case of default. This is the reason so lots of lending institutions like FHA so much. If you default on your loan, the FHA is obligated to purchase the loan back from your lending institution. In the end, the lender's know that whatever the borrower does they are covered.
Questions come up about where does the FHA get its money to buy back these "bad loans"? When you accept an FHA loan, they are required to pay mortgage insurance. The cost is paid at closing of the mortgage taken out x .0175, and monthly insurance of the amount borrowed x .0005. After it is all said and done on a home purchase of $150,000 at closing, you will need to come up with $2,625 ($150,000 x .0175). Every single month, a borrower will be required to pay an additional $75 ($150,000 x .0005). When initially glancing, it may sound like a lot of funds. However, did you know you are typically going to have mortgage insurance on a conventional loan too. What's more is the rate will be much higher with a conventional mortgage.
It wasn't so long ago that applying for an FHA loan was a major pain! The reason for this was because of more inspections, more fees, the time process to them was delayed, more documentation was necessary, it became difficult to qualify for, rules for appraisals were not favorable, and more items. Nowadays, getting an FHA loan has been easier and the extra fees are restricted.
If you realistically do a side by side comparison between the FHA and typical home loans, you'll see the advantages of FHA.
The FHA Down Payment is a minimum of 3.5% vs 5% for conventional mortgages.
As outlined earlier, mortgage insurance for a conventional loan is more costlier than with FHA mortgages.
The origination fee charged by mortgage brokers, lenders, and loan officers is restricted to a maximum of 1% while conventional loans are substantially more if they choose to charge more based on the interest rate, credit score, etc.
Credit qualifications for FHA is at 620 while conventioanl mortgages nowadays are around 680. If you have a bankruptcy or foreclosure, a borrower has to wait four years (in some cases 5 years) for a conventional loan while with FHA it is down to two and three years respectively.
The debt to income ratios to qualify for an FHA loan are higher which helps more borrowers qualify
than a conventional loan. On FHA loans, the seller can give the buyer credits up to 6% of closing cost while conventional loans are restricted to 3% closing cost credit.
The only glaring difference for buyers in high costs areas is the FHA has a maximum loan limit. So if you intend to buy a home in an area which has sales prices significantly more than the current FHA loan limit, you will be required to make a larger down payment.
From looking at both types of loans above which loan looks better to you?
Ray Heinson is an investor in real estate and suggest these resources for
FHA Mortgage Loanss and to find
FHA Streamline Mortgage Refinancing from trusted lenders in your area.
