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FHA Mortgage Loans
By: Kirk Haverkamp
Updated and reviewed: Jul 8, 2013
Since the 1930s, the Federal Housing Administration (FHA) has been helping families become homeowners with a set of loan programs commonly known as FHA mortgage loans. Despite the longevity and popularity of these loan programs, many would-be homeowners don't really know all they should about them.
The FHA is an agency of the Federal government that insures private loans that are issued for new and existing housing, as well as loans approved for home repairs. Essentially, it acts as a buffer for lenders by reducing their risk in issuing loans, which makes it easier for borrowers to obtain loans as well. Formed in 1934 by Congress, the FHA became part of the Department of Housing and Urban Development's Office of Housing (HUD) in 1965.
FHA loans are not just for first-time buyers - they are available to anyone looking to purchase or refinance a home. You can even refinance with an FHA mortgage even though your current mortgage is not an FHA loan.
The most popular FHA home loan program nationwide is the 203(b) FHA home loan, which allows borrowers to make down payments of as little as 3.5 percent of the home purchase price. In addition, 100% of the money needed to close - including the down payment - may be a gift from a relative, non-profit organization or government agency.
The FHA plays a critical role in financing for minority borrowers, first time home buyers, borrowers who have troubled credit history, and borrowers who have little money to put down on a home.
- About half of first-time homebuyers used FHA loans in 2012, according to various estimates, and first-time buyers made up about three-quarters of FHA home purchase loans that year.li>
- For minority home buyers, FHA mortgages account for about half of all home loans for both African American and Hispanic/Latino homebuyers, compared to about one-quarter of all home purchase mortgages nationwide, according to the Department of Housing and Urban Development (HUD).
FHA Loan Limits
The FHA is self-financed, designed to perform entirely by generating its own income at no cost to the taxpayer. Funds generated by mortgage insurance paid by homeowners with FHA mortgages are used to operate the program. As of early 2013, the FHA has never received taxpayer funds during its 80-year history, including the aftermath of the 2008 economic crash. The FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools and other forms of revenue.
One of the big attractions of an FHA home loan is that the credit criteria for a first-time borrower is not as strict as on conforming loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or a short credit history may have an easier time obtaining FHA financing.
Another advantage of FHA home loans are they are assumable, meaning that if you sell the home the new buyer can simply take over the mortgage payments rather than obtain a new loan. This can be a major selling point if you bought the home at a time of low mortgage rates.
It used to be that the FHA required that certain closing costs, called non-allowable costs, be paid by te seller or lender, on the grounds that the buyer should not have to borrow additional money to pay for them. However, these were largely eliminated in 2006 and today the only cost that sellers must pay for is the Tax Service Fee for tax lien searches on the property.
FHA mortgages require an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan amount. While this is an expense other mortgages do not have, it can be rolled into the loan amount, resulting in a minor increase in one’s monthly payments. The upfront premium is also partially refundable if the loan is paid off in the first three years.
In addition to the upfront insurance premium, FHA mortgages also require annual mortgage insurance premiums on any home loan with less than a 20 percent down payment. These fees tend to be higher than what you’d pay for private mortgage insurance (PMI) on conventional mortgages, and range from 1.30 - 1.35 percent of the loan amount on 30-year fixed-rate mortgages and 0.45 percent to 0.70 percent on 15-year fixed-rate mortgages.
In addition, FHA borrowers who make less than a 10 percent down payment or have less than 10 percent equity when refinancing will be required to carry mortgage insurance for the life of the loan, for loans originated on or after June 3, 2013. That’s in contrast to PMI on conventional mortgages, which can be cancelled once the loan balance falls to 80 percent of the home value. FHA borrowers who put up at least 10 percent but less than 20 percent must carry mortgage insurance for at least 11 years.
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Additional FHA Resources
Types of FHA Loans
The Federal Housing Administration (FHA) has quietly supported the dream of homeownership for more than 70 years. Mortgage loans available through the FHA serve low- to middle-income homeowners and homebuyers.
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