For today's home buyers who don't have -- or don't want -- to make a 20% down payment, there are a multitude of home loan options. Low- and no-downpayment mortgages are readily available from U.S. lenders, and most will be approved with even marginal credit scores on behalf of a borrower.
One such low-downpayment option is the FHA loan.
For years, the FHA advertised its products as loans for consumers "on the margins" of homeownership; those with less-than-perfect credit scores, elevated debt-to-income ratios, or a lack of credit history.
The FHA program has evolved since its 1934 inception, though, and today, FHA loans are among the most flexible and rewarding products available to buyers and homeowners looking to make a refinance.
There are 6 common misconceptions about the FHA mortgage and you'll want to keep these false beliefs from standing between you and a home loan approval.
Plus, with effective FHA mortgage rates near their lowest levels of all-time, getting an FHA loan is cheaper and easier than its been in more than a decade.
Fact : The FHA is not a mortgage lender. It's a mortgage insurer.
The acronym "FHA" stands for Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. The FHA doesn't make mortgage loans to home buyers or refinancing households. Rather, the FHA provide mortgage insurance to banks, credit unions, and other lenders which make loans meeting FHA insurance standards.
The FHA reimburses lenders for a portion of incurred losses in the event that their FHA-insured loans default, or go to short sale or foreclosure.
Fact : FHA loans are not for first-time buyers only. FHA loans can be used by first-time buyers and repeat buyers alike.
The FHA loan is often marketed as a product for "first-time buyers" because of its low downpayment requirements. However, last decade, many U.S. homeowners have lost home equity in the housing market downturn. These repeat buyers may have little money for downpayment -- even after the sale of their former home.
The FHA will insure mortgages for any primary residence. There is no requirement that you be a first-time buyer.
Fact : FHA loans do not require a 20 percent downpayment.
For home buyers, FHA mortgages require a 3.5 percent downpayment with the fewest "strings" attached. This makes the FHA mortgage one of the most lenient mortgage types available nationwide.
There are very few credit restrictions with the FHA loan and the agency allows your 3.5% downpayment to comes as a gift from a family member, employer, charitable organization or government home-buyer program.
Other low-downpayment mortgage programs have eligibility requirements. The VA loan, for example, allows for 100% financing but you must be an eligible military borrower to use it.
The USDA Rural Development loan also allows 100% financing but the USDA program requires that your home be in a less-developed census tract; and that your household income is within certain limits.
Fannie Mae's 3% downpayment program -- the Conventional 97 -- limits loan sizes to $417,000 and can be used for single-family residences only. FHA loans are available for loans of up to $729,750 for streamlined refinance.
Fact : Lenders can approve FHA loans with no credit score whatsoever.
FHA loans feature some of the flexible and forgiving credit standards of any available loan type. With an FHA-backed loan, perfect credit is not required, and mortgage lenders are expressly instructed to consider a borrower's complete credit history -- not just isolated instances of late payments here and there.
You can get an FHA loan if you've recently experienced a short sale, foreclosure or bankruptcy via the FHA Back to Work program. Sometimes, a waiting period is required, but not always. Depending on your personal circumstances, you may be eligible to purchase another home using FHA financing right away.
Since 2011, FHA mortgage rates have been lower than comparable conventional products.
Note that not everyone will qualify for an FHA home loan. Borrowers with a "banged-up" history, though, have a much better chance of getting loan approval via the FHA than other government agencies.
Even if you've been turned down for other types of credit, such as an auto loan, credit card or other home loan programs, an FHA-backed loan may open the door to homeownership for you.
Fact : FHA loans can be more expensive, or less expensive, than other loan types. The long-term cost of an FHA loan depends on your loan size, your downpayment, and your location.
The biggest cost of an FHA home loan is usually not its mortgage rate -- FHA mortgage rates are often less than comparable conventional mortgage rates via Fannie Mae and Freddie Mac. The biggest cost is FHA mortgage insurance.
FHA mortgage insurance premiums (MIP) are payments made to the FHA to insure your loan against default. MIP is how the FHA collects "dues" to keep its program available to U.S homeowners at no cost to taxpayers.
MIP is paid in two parts. The first part is paid at closing and is known as Upfront MIP. Upfront MIP is automatically added to your loan balance by the FHA so no payment is required at settlement. Upfront MIP is equal to 1.75% of your loan size.
By contrast, annual mortgage insurance premiums are paid monthly, in twelve equal installments annually.
In early-2015, a new FHA MIP was released which reduces loan costs for FHA borrowers.
Annual MIP can range as high as 1.10% in high-cost areas such as Orange County, California; Potomac, Maryland; and, New York City, New York. For most borrowers, though, MIP is between 0.45% and 0.85% annually.
As compared to conventional loans with less than 20% downpayment, FHA MIP is sometimes more costly, and sometimes less so. This chart compares the medium-term costs of a conventional mortgage versus an FHA mortgage.
Fact : All FHA loans are not the same. There are many "types" of FHA loans, and mortgage rates vary by lender.
As an agency, the FHA publishes and maintains minimum eligibility requirements all of the loans it insures. However, FHA lenders enforce additional requirements on FHA loans, known as "investor overlays."
A sample of investor overlays includes raising the minimum FHA mortgage score requirement; or, requiring additional time since a bankruptcy, short sale, or foreclosure; or requiring employment verification for an FHA Streamline Refinance transaction.
Because of overlays, when you've been turned down for an FHA mortgage by Lender A, you should always try to apply with Lender B which may approve your FHA loan request. Plus, mortgage rates can be very different from bank-to-bank.
In addition, the FHA offers special refinance loans, home construction loans, and various benefits to eligible applicants.
The FHA insures home loans in all 50 states, in the District of Columbia, and in many U.S. territories including Puerto Rico, Guam and the U.S. Virgin Islands. Whether you're a first-time buyer or an experienced one, an FHA-insured mortgage may be your best home financing option.
See today's FHA mortgage rates to see how FHA loans can help you. Getting rates online is fast and free and no social security number is required.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2015 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)