An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
FHA loans have become very popular because the requirements are less strict than conventional loans. Borrowers can qualify for an FHA loan with a down payment as little as 3.5% and a credit score of 580 or higher. Keep in mind that the lower the credit score, the higher the interest borrowers will receive.
Benefits of FHA Loans:
Typically, an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. For FHA loans, down payment of 3.5 percent is required for maximum financing.
Borrowers who cannot afford a 20 percent down payment, have a lower credit score, or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best loan solution for them. Even with a credit score between 500 – 579, a borrower may qualify for a home with 10% down.
Mortgage Insurance Required
Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront -– or, it can be financed into the mortgage –- and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.
Two Types of Insurance Required:
Upfront mortgage insurance premium (UFMIP) — This one-time, upfront premium payment due at the time of closing. Borrowers also have the option to roll this into their mortgage. The premium is 1.75% of the home loan, regardless of their credit score. Example: $250,000 loan x 1.75% = $4375.00.
Annual MIP (charged monthly) — This annual premium is actually a monthly charge that will be figured into your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s loan-to-value (LTV) ratio, loan size, and length of loan. Also, the duration of your annual MIP will depend on the amortization and LTV ratio on your loan origination date.