Mortgages Step 4D: FHA Mortgages

The Federal Housing Administration (FHA) was formed in 1934 to help the country recover after the Great Depression. The goal of the FHA was to help as many people to buy homes as possible. It accomplished the goal by established lenient guidelines that currently only require 3.5% down payment, and credit scores as low as 580.

The FHA doesn’t actually make loans, but it guarantees to buy the loan back from the lender if it goes into default. Although FHA mortgages are not only limited to first time home buyers, and have no income restrictions, most FHA mortgages are issued to first time buyers.

FHA loans are for owner-occupied homes only, and you can only have one FHA loan at a time. FHA mortgages can also be used for refinances.

What are the benefits of FHA Mortgages?

• You only need to put 3.5% down, and you are allowed to get a seller’s assist of up to 6%. Assuming you are buying a house for $200,000, and you are putting down 3.5%, with an approximate 5% in closing costs, you will need $17,000 to buy the house. With 6% seller’s assist ($12,000) thrown in, you can buy the house with only $5000.
• FHA loans are more relax in their underwriting guidelines. You may qualify for a loan even if you have less than stellar credit, have a bankruptcy or foreclosure in the past.
• If you cannot qualify for the loan on your own, your parents or family members can be added as a coborrower, and their income will be used to help you qualify.
• FHA loans are ‘assumable’, which means if you want to sell your home, the buyer can just assume the loan you have instead of getting a brand new loan on their own.

Why should I consider other loans?

• FHA loans require a rather hefty mortgage insurance premium (MIP) (Which is basically the same as the PMI for conventional loans). There is an upfront MIP required of 1.75% of the home loan, plus a monthly MIP premium. And unlike a PMI for a conventional loan, you will have to pay the MIP for the life of the loan.
• FHA loans require the house to meet certain conditions and must be appraised by an FHA-approved appraiser. That may sound good to you as a buyer, but may not appeal to a seller, especially if there are multiple offers.
• Just like VA loans, the processing for FHA loans may take longer than conventional loans.
• There is a maximum loan amount for FHA loans. For some counties the limit for one-unit properties is $271,050, but for some Hudson Valley Counties the FHA single family property loan limit is $625,500 (as of June 2014). Click here for a list of the lending limits for different properties in different counties in New York.

If you are interested in buying a fixer upper property, you can also look into a FHA 203(K) loan, which allows you buy a home, fix it up, and include all the costs in one loan.

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